Value of a Firm (Using Operating Free Cash Flows)

The value of the firm can be expressed using the following formula:

$Firm Value (V) = \sum_{t=1}^{\infty }\frac{OFCF_{t}}{(1+WACC)^{t}}$

Where:

• V is the Value of the firm
• OFCF is the Operating Free Cash Flow After Tax
• WACC is the Weighted Average Cost of Capital

The Operating Free Cash Flow (OFCF) is measured as:

OFCF = Revenue – Operating Expenses – Capital Expenditure

The Weighted Average Cost of Capital (WACC) is measured as:

$WACC = r_{e}\frac{E}{V}+r_{d}(1-t)\frac{D}{V}$

Where:

• re = Cost of equity
• rd = Cost of debt
• E = Value of the firm's equity
• D = Value of the firm's debt
• V = E + D
• E/V = Percentage of equity financing
• D/V = Percentage of debt financing
• t = Tax rate

The expected future cash flows of a firm can also be expressed as a perpetuity. In that case, the firm’s value can simply be expressed as:

$V = \frac{OFCF_{t}}{WACC}$