F08fin Chapter 7 Slides rev E

F08fin Chapter 7 Slides rev E - Other DCF Models Slides for...

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Other DCF Models Slides for Chapter #7

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Fall 2008 Other DCF Models OVERVIEW OF DCF MODELS Estimates intrinsic value Discounts cash flow by appropriate cost of capital Models differ in their measure of cash flow (CF), in the discount rate (r), and whether they value the firm or the common stock Each model has certain benefits in practice 2
3 DCF MODELS Enterprise DCF Dividend Discount Adjusted Present Value (APV) Capital Cash Flow (CCF) Equity Cash Flow Fall 2008 Other DCF Models

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4 DCF MODELS ENTERPRISE DCF Measure of Cash Flow : Free cash flow to firm (FCF) (1) Discount Rate : WACC What is Valued : TOC When it Works Best : Stable capital structure (1) NOPAT less increase in TOC Fall 2008 Other DCF Models
5 DCF MODELS DIVIDEND DISCOUNT Measure of Cash Flow = Discount Rate = What is Valued = When it Works Best = Dividend-paying stock with predictable ratio of dividends to net income Dividends Cost of Equity Common Equity Fall 2008 Other DCF Models

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6 DCF MODELS ADJUSTED PRESENT VALUE Measure of Cash Flow : Free cash flow to firm (FCF) + value of interest tax shields Discount Rate : Unlevered cost of equity (Ku) (1) for FCF; Pretax cost of debt for tax shields What is Valued : TOC When it Works Best : Changing capital structure (1) To get Ku, substitute unlevered beta into CAPM formula. Fall 2008 Other DCF Models
7 DCF MODELS CAPITAL CASH FLOW Measure of Cash Flow : Free cash flow to firm (FCF) + value of interest tax shields Discount Rate : Unlevered cost equity (Ku) (1) What is Valued : TOC When it Works Best : Changing capital structure (1) To get Ku, substitute unlevered beta into CAPM formula. Fall 2008 Other DCF Models

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8 DCF MODELS EQUITY CASH FLOW Measure of Cash Flow : Cash flow to equity (1) Discount Rate : Cost equity What is Valued : Common equity When it Works Best : For financial institutions (1) Net income minus increase in TOC plus net debt increase. Fall 2008 Other DCF Models
9 TOC VALUE TO EQUITY VALUE Enterprise DCF, APV, Capital Cash Flow calculates TOC value. Usually you want equity value. Equity Value = Fall 2008 Other DCF Models

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10 4 STEPS TO IMPLEMENT DCF MODELS Forecast cash flows over projection perod Calculate terminal value Estimate discount rate Calculate value (TOC or equity) Fall 2008 Other DCF Models
11 STEP 1 FORECAST CASH FLOWS OVER PROJECTION PERIOD Extend the forecast period until the variable growth in cash flow has stabilized to a constant growth rate no greater than that of the economy Fall 2008 Other DCF Models

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12 STEP 2 CALCULATE TERMINAL VALUE Two formulas to calculate TV Constant growth formula: requires 3 inputs Cash flow in 1 st year after explicit forecast period Applicable cost of capital Growth rate in cash flow Market multiple: requires 2 inputs Estimated earnings (or other financial parameter) for some year in future Selection of an appropriate multiple for firm at that time Fall 2008 Other DCF Models
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This note was uploaded on 01/26/2009 for the course FBE 441 taught by Professor Callahan during the Fall '07 term at USC.

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F08fin Chapter 7 Slides rev E - Other DCF Models Slides for...

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