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solved by separating the value of the business into two periods, during and after an explicit forecast period. In this case,

„ . Present value of cash flow ^ Present value of cash flow ' during explicit forecast period after explicit forecast period

The value after the explicit forecast period is referred to as the continuing value. Formulas derived from discounted cash flows using several simplifying assumptions can be used to estimate continuing value. One such formula that we recommend is as follows (Chapter 12 contains a more detailed look at continuing value approaches):

Net operating profits less adjusted taxes (in the year after the explicit forecast period)

Incremental return on new invested capital

Expected perpetual growth in the company's NOPLAT

Weighted average cost of capital

Where NOPLAT

Exhibit 8.6 shows the continuing value calculation for Hershey. Value of Debt

The value of the company's debt equals the present value of the cash flow to debt holders discounted at a rate that reflects the riskiness of that flow. The discount rate should equal the current market rate on similar-risk debt with comparable terms. In most cases, only the company's debt outstanding on the valuation date must be valued. Future borrowing can be assumed to have zero net present value because the cash inflows from these borrowings will exactly equal the present value of the future repayments discounted at the opportunity cost of the debt.

Exhibit 8.6 Hershey Foods—Continuing Value

Value of Equity

The value of the company's equity is the value of its operations plus nonoperating assets, such as investments in unrelated, unconsolidated businesses, less the value of its debt and any nonoperating liabilities. The valuation of Hershey's equity (as illustrated in Exhibit 8.3) is $9.4 billion, including $450 million representing the value of its pasta business, which was sold in early 1999.

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