manual of financial concepts
RESIDUAL VALUE OF THE COMPANY
It is the value that we consider for the company in the last year of our projections.
We can use different methods to calculate that value. In our models we have considered a constant rate of increase in perpetual free cash flows starting in last year.
RV = (CFn+1)/(k-g) = (CFn (1+g))/(k-g)
RV: Residual value of the company in year n.
CFn: Free cash flows generated by the company in year n.
n: Last year of our projections.
k: Discount rate.
g: Constant rate of increase in perpetual free cash flows.
Example of RV calculation: