1) prepare a set of reorganized financial statements. To assure consistency, the reorganized financial statements should reconcile (i.e., net operating profit less adjusted taxes to net income, invested capital to total funds invested).
a) Next, use the reorganized financial statements to calculate free cash flow. Free cash flow equals NOPLAT plus noncash operating expenses less investments in invested capital.
b), we recommend reconciling free cash flow to cash flow available to investors. Similar to the reconciliation process for NOPLAT and invested capital, reconciling cash flows prevents double counting or excluding critical cash flows.
c), create forecast ratios for each item in NOPLAT and invested capital. Use these forecast ratios to project future NOPLAT, invested capital, and consequently future free cash flow (step 5).
d) estimate the value of core operations by discounting free cash flow and continuing value at the weighted average cost of capital.
To move from the value of core operations to equity value, add nonoperating assets and deduct debt and debt equivalents.