Tag Archives: Economic Equations

Calculating the Value of a Company

25 Apr

As always, this lesson is not intended to be professional advice. This is simply my lesson material for ESL students in a Managerial Economics class. Posted here for their use or for helping other Economics students.

Finding the Value of the Firm

We measure the success of a financial manager (how well they maximize profits) by finding the overall Value of the Firm (公司的价值).  

Value of the Firm = Value of the Company = Present Value (现值)= How much money ($$/¥/₩) the company would be worth if you tried to sell it today (多少钱该公司将是值得的,如果你想出售它). The Value of the Firm should include

  1. How much money the company is worth today and
  2. Expected profits in the future. 

Mathematical Equation for Calculating the Value of the Firm

  1. Value of the Firm = Current Profit + Expected Future Profit.

Each Year’s Profit is calculated with the following formula:

  • X = Current or Expected Accounting Profit (预期会计利润) = Revenue – Explicit Costs
  • R = Risk-Adjusted Discount Rate (风险调整贴现率) (although we hope we will make the expected accounting profit this year or in future years, there is always the possibility that we will not. No one will pay us the full expected value of the company because of this risk. So to give the buyer some protection, just in case, we remove the Risk-Adjusted Discount Rate from the total.)(我们从方程中删除的金额,因为我们现在可能不会真正使所有预期的利润,我们想要的)
  • T = Number of Years from Today


Year 1, Company A makes $180,000. Year 2, Company A makes $150,000. Year 3, Company A makes $100,000. The Risk-Adjusted Discount Rate is 13%. 1年,公司180000美元。2年,公司150000美元。3年,公司100000美元。风险调整贴现率为13%

The Equation for 1 Year is:

The Equation for 3 Years is:

Filling in our known information, the equation for the Value of Our Firm is:

Value of the Firm = $346,069


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