basics - Basics of Discounted Cash Flow Valuation Aswath...

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1 Basics of Discounted Cash Flow Basics of Discounted Cash Flow Valuation Valuation Aswath Damodaran
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2 Discounted Cashflow Valuation: Basis for Discounted Cashflow Valuation: Basis for Approach Approach where, n = Life of the asset CF t = Cashflow in period t r = Discount rate reflecting the riskiness of the estimated cashflows Value = CF t (1+ r) t t =1 t = n
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3 Equity Valuation versus Firm Valuation Equity Valuation versus Firm Valuation l Value just the equity stake in the business l Value the entire business, which includes, besides equity, the other claimholders in the firm
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4 I.Equity Valuation I.Equity Valuation l The value of equity is obtained by discounting expected cashflows to equity, i.e., the residual cashflows after meeting all expenses, tax obligations and interest and principal payments, at the cost of equity, i.e., the rate of return required by equity investors in the firm. where, CF to Equity t = Expected Cashflow to Equity in period t k e = Cost of Equity l The dividend discount model is a specialized case of equity valuation, and the value of a stock is the present value of expected future dividends. Value of Equity = CF to Equity t (1+ k e ) t t=1 t=n
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5 II. Firm Valuation II. Firm Valuation l The value of the firm is obtained by discounting expected cashflows to the firm, i.e., the residual cashflows after meeting all operating expenses and taxes, but prior to debt payments, at the weighted
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This note was uploaded on 11/20/2009 for the course MBA financial taught by Professor Ibraheem during the Spring '09 term at Dubai Aerospace Enterprise University.

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basics - Basics of Discounted Cash Flow Valuation Aswath...

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