Finding Firm Value without a Pro Forma Analysis (corrected)

We present a firm value calculator (FVC) that uses applications of growth-annuity and growth-perpetuity equations. The FVC provides the same detailed analysis of firm value as the more complicated pro forma analysis and can thus replace a pro forma analysis or be used to check or correct it. The FVC can be easily implemented—through either a computer spreadsheet or a handheld calculator. The algorithmic nature of the FVC may also be implemented through computer programming to quickly produce a large number of analyses, which can save a practitioner a great deal of time when many companies are to be analyzed or compared. Pro forma analysis is frequently used to assess the value of a company or a proposed project, but it is a tedious endeavor involving spreadsheets. In pro forma analysis, the analyst often needs to worry about the issue of the spreadsheet cell calculations as much as the assumptions that drive the analysis. The mechanics of the spreadsheet may be mundane, but the pro forma results are useless unless the mechanics are carried out correctly. The analyst ordinarily has no other way to assure accuracy but to continuously check and recheck the individual cell calculations.We present a firm value calculator (FVC) based on free cash flow that uses applications of growth-annuity and growth-perpetuity equations. The FVC provides the same detailed firm value analysis as the more complicated pro forma analysis, but it is so simple that it can be performed on a handheld calculator or readily programmed into a spreadsheet software package. The algorithmic format of the FVC makes it amenable to many programming platforms. It can be used as the sole measure of company value or to check the figures of an existing pro forma analysis.The FVC can save practitioners—whether financial analysts or corporate financial managers—a great deal of time when they must analyze many companies. When practitioners do not need to focus on mechanical accuracy, they can spend more time on assessing the more important fundamental logic of the analysis.To provide a basis for comparing the two methods, we first set up the typical assumptions for a pro forma analysis and carry out the analysis. We then develop the necessary equations for the FVC. The equations are derived in a clear, logical fashion that anyone with a basic knowledge of the time value of money can readily understand. Next, we compare the FVC final and intermediate calculations with those calculations performed under the initial pro forma analysis and show that the FVC produces the same results with much less effort.Although we focus solely on free cash flow, other cash flow analyses can be readily developed. Sensitivity analysis can also be easily implemented, particularly with current versions of spreadsheet software.