The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit (Little Books. Big Profits)

by Aswath Damodaran

While all of these computations are based upon a stable growth dividend discount model, the conclusions hold even when we look at companies with high growth potential and with other equity valuation models. We can do a similar analysis to derive the firm value multiples. The value of a firm in stable growth can be written as: Since the free cash flow of the firm is the after-tax operating income netted against the net capital expenditures and working capital needs of the firm, this can be rewritten as follows: Dividing both sides of this equation by sales, and defining the after-tax operating margin as after-tax operating income divided by sales, yields the following: