R Tutorial: Calculating Equity Value

Want to learn more? Take the full course at https://learn.datacamp.com/courses/equity-valuation-in-r at your own pace. More than a video, you'll learn hands-on coding & quickly apply skills to your daily work. --- We now put all of the calculations together to calculate the firm's equity value. The firm's equity value is equal to the sum of (a) the present value of the FCFE during the projection period and (b) the present value of the terminal value. We now discuss how to calculate these two components in R. To implementing the present value of free cash flows during the projection period, we first setup our example. Suppose you are valuing a firm with FCFE of $100 million each year for the first 5 years. We then create a variable for the number of discount periods. Here, we use the seq() command to generate the number of years to discount - 1, 2, 3, 4, and 5. We then calculate the Present Value Factor, which is an amount we multiply to the cash flow to get to the Present Value. The PV Factor is calculated as 1 over 1 plus the cost of equity raised to the number of discount periods. Finally, the PV of the FCFE during years 1 to 5 is the sum of amounts in the PV column. For the terminal value, we can continue from our example in the last video. There, we had a Terminal Value in Year 5 of $858 million. We can use the same cost of equity of 15% to discount the Terminal Value 5 years. This yields a present value of $427 million. We now add pv_fcfe and pv_tv to get to an equity value of $762 million for our firm. We are not done though. When you look up a quote of a stock, the quotes are in price per share. To transform the equity value into a per share number, we have to divide the equity value by the firm's shares outstanding. Suppose that the firm has 15 million shares outstanding, then the equity value per share is equal to $762 million divided by 15 million shares or $50.80 per share. That was quite a bit of material. Now it's time to practice. #R