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The final example of an ever-changing multiple was that applied to high-growth Microsoft From 1994 to 1996, Microsoft s multiple of revenues more than doubled, from 6 to 1426 ASSET VALUATION In the past, the value of a company s assets had a great significance in determining the company s overall valuation Today, most American companies do not have many tangible assets because each year fewer things are produced in the United States Most are produced overseas in low-wage-paying countries like China, India, and Taiwan The result is that over time, the value of a company is dependent less on its assets than on its cash flow Asset value tends to be most meaningful in cases in which financially troubled companies are being sold In that case, the negotiation for the value of the company typically begins at the depreciated value of its assets CAPITALIZATION OF CASH FLOWS Free Cash Flow Method The most complicated and involved valuation model is the free cash flow model, also known as the discounted cash flow or capitalization of cash flow model It is a model that relies on projections filled with assumptions, because there are so many unknown variables Therefore, it is the model most commonly used to value high-risk start-ups Simply stated, free cash flow is the portion of a company s operating cash flow that is available for distribution to the providers of debt (ie, interest and principal payments) and equity (ie, dividend payments and repurchase of stock) capital This is the cash that is available after the operating taxes, working capital needs, and capital expenditures have been deducted Using this valuation method, one approach is to forecast the FCF as the Japanese do: for 25 years without regard to what happens later, because its discounted value will be insignificant Another similar, and more commonly used, approach is to separate the value of the business into two time periods: during and after an explicitly forecasted period The during period is referred to as the planning period The after period is referred to as the residual.



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The FCF valuation formula Equation 7 4 is the sum of the present value (PV) of the free cash flow for the planning period and the present value of the residual value

Of the potential information warfare targets that were evaluated for their level of appeal to terrorists and rogue criminals it is important to examine which targets may be in the greatest danger It is not surprising that terrorists and rogue criminals would have some common interest in targets Among the types of organizations that both may decide to strike are armored car services, commercial banking, and credit card issuing firms Stock exchanges and brokerages are also on the mutual favorites list of terrorists and rogue criminals Targets that were rated of high interest for both the terrorist and rogue criminals are shown in Table 7-2

E Q U A T I O N 7-4





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necessarily dead but is in immediate danger Life is dependent on oxygen, which is breathed into the lungs and then carried by the blood to every body cell Since body cells cannot store oxygen and since the blood can hold only a limited amount (and only for a short time), death will surely result from continued lack of breathing However, the heart may continue to beat for some time after breathing has stopped, and the blood may still be circulated to the body cells, since the blood will, for a short time, contain a small supply of oxygen, the body cells will not die immediately For a very few minutes, there is some chance that the person s life may be saved The process by which a person who has stopped breathing can be saved is called arti cial ventilation (respiration) The purpose of arti cial respiration is to force air out of the lungs and into the

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To calculate the PV of the FCF for the planning period, the following steps must be followed: 1 Determine the planning period It is customarily 5 years 2 Project the company s earnings before interest and taxes (EBIT) for five years The use of EBIT assumes that the company is completely unleveraged; it has no debt in its capital structure 3 Determine the company s EBIT tax rate This will be used to calculate the exact amount of adjusted taxes to be deducted These are adjusted taxes because they ignore the tax benefits of debt financing and interest payments, since this model, as stated previously, assumes a capital structure that does not include debt 4 Determine the amount of depreciation expense for each of the 5 years This expense can be calculated in several ways: a Assume no depreciation expense because the capital expenditures for new assets and the corresponding depreciation will cancel each other out If that assumption is made, then there should also be a zero for capital expenditures for new assets b Using historical comparables, make the future depreciation expense a similar constant percentage of fixed assets, sales, or incremental sales c Using the company s actual depreciation method, forecast the company s value of new assets from capital expenditures and compute the actual depreciation expense for each of the forecasted years

Table 7-2: Targets that Appeal to Both Terrorists and Rogue Criminals Sector/Industry Terrorist Group Rogue Criminal Interest Level Interest Level

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