Approaches to Equity Valuation •Discounted Cash Flow Techniques (DCF) - Present Value of Dividends (DDM) - Present Value of Free Cash Flow to the Firm - Present Value of Free Cash Flow to Equity •Relative Valuation Techniques - Price/earnings Ratio (P/E) - Price/Cash Flow Ratio (P/CF) - Price/Book Value Ratio (P/BV) - Price/Sales Ratio (P/S)
Discounted Cash Flow Valuation Approaches •Measure of cash flow - Dividends - Free Cash Flow to the Firm - Free Cash Flow to Equity •Used to derive intrinsic value. •Dependent on growth rates of cash flows and estimate of the discount rate.
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Relative Valuation Techniques •Provide information about how the market is currently valuing securities. •Does not provide guidance whether current valuations are appropriate. •Appropriate to use when: - Have a good set of comparable entities, i.e., comparable companies similar in terms of industry, size, and risk. - Not either seriously undervalued or overvalued.