5
Analogy between bond and company valuation
•In principle the valuation of a bond and a valuation of a company
is the same:
–You
discount the future cash-flows into present, sum them up and thus get the bond/company value
–OR: you calculate how much the company/bond
earns above or below its opportunity cost (cost of
capital) , discount these values to present and add
this to or subtract this from the book value
•We see the latter method more illustrative and practical with company
valuation and thus the following pages will demonstrate
how to use this method in theory and in practice.
–We call
the difference between company’s return and its capital costs with
the name “EVA” (Economic Value Added) which is often called also Residual
Income or Economic Profit as the term EVA is registered trademark of Stern Stewart & Co.