WEEK 7 DISCOUNTED CASH FLOW VALUATION SHORT .pptx

# WEEK 7 DISCOUNTED CASH FLOW VALUATION SHORT .pptx -...

• 41

This preview shows page 1 - 17 out of 41 pages.

Financial Statement Analysis and Security Valuation Discounted Cash Flow Valuation April 12, 2018

Subscribe to view the full document.

What You Will Learn From This Chapter How the dividend discount model works (or does not work) How a constant growth model works How does a two-stage discounted cash flow model work? What is meant by free cash flow How discounted cash flow valuation works 4-2
Valuation Models for Going Concerns CF 1 CF 2 CF 3 CF 4 CF 5 A Firm 1 2 3 4 5 0 d 1 d 2 d 3 d 4 d 5 Dividend Flow 1 2 3 4 5 0 TV T T d T Equity The terminal value, TV T is the price payoff, P T when the share is sold Valuation issues : The forecast target: dividends, cash flow, earnings? The time horizon: T = 5, 10, ? The terminal value? The discount rate? 4-3

Subscribe to view the full document.

Required Rate of Return Required Rate of Return is the return necessary to compensate an investor for the risk involved in an investment. Used as a target return to compare forecasted returns on potential investment option. For example, if the average return on stock investment is 15%. The required rate of return is 15%.

Subscribe to view the full document.

Present Value vs. Future Value The first step in a time value analysis is to set up a time line to see what happens in the future. PV represents \$100 that is in a bank account today and FV is the value that will be in the account at some future time (3 years from now.)
Future Value

Subscribe to view the full document.

Required rate of return: 10% \$1,000[1/1.10] + 1,000 [1/1.10] 2 + 1,000 [1/1.10] 3 = \$2,486.80
Present Value Example

Subscribe to view the full document.

The Dividend Discount Model Forecast of Dividends Constant Dividend: Vo = stock value, D1 = dividend year 1, D2 = dividend year 2, K = required rate of return R R R R R

Subscribe to view the full document.

The Dividend Discount Model: Forecasting Dividends with terminal value 4-12 P E = 1 + the required rate VE = VALUE OF EQUITY D = dividend PE = required rate of return
Example You want to invest in Company B for one year, what is its value today? You expect to receive \$20 dividend in one year. You expect the price of the stock to be \$150 in one year. Required rate of return: 10% \$154 (\$20/1.1 + \$150 / 1.1)

Subscribe to view the full document.

Terminal Values for the DDM A. Capitalize expected terminal dividends B. Capitalize expected terminal dividends with growth 4-14 g = the forecasted rate of growth R R PV T 1 T T E d TV P 1 T 1 T T E d TV P g
Terminal Values for the DDM A . A firm is paying \$10 dividend perpetually, the required rate of return is 10%, what is the value of equity? B. The same firm has a constant growth rate of 5% each year, what is the value of equity? 4-15 \$10 / (0.1) = \$100 \$10 / (0.1 – 0.05) = \$200 R R T 1 T T E d TV P 1 T 1 T T E d TV P g

Subscribe to view the full document.

Some Financial Math: The Value of a Perpetuity and a Perpetuity with Growth The Value of a Perpetuity A perpetuity is a constant stream that continues without end. The periodic payoff in the stream is sometimes referred to as an annuity, so a perpetuity is an annuity that continues forever. To value that stream, one capitalizes the constant amount expected. If the dividend expected next year is expected to be a perpetuity, the value of the dividend stream is
• Fall '16
• Jane

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern