Lecture 10 & 11 spr 10 - BVEcellTheyour free the...

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Represents the fact that value is based on ‘expectations’ of the future To get the present value, it needs to be discounted to today by a factor of (1+r e ) -(T-1) The risk free interest rate. Use long term US bond yield for long horizon projects The expected risk premium for the market index over long-term bonds. The systematic risk of a stock, estimated using time series regressions Think of r e as a hurdle rate e BVE 0 (sum=0). We can then rearrange to express value as a function of beginning BVE and future residual income. our implied price formula into any cell. You can use a white font to ‘hide’ the price. ows and columns with the dimensions you want and the appropriate values. s the cell on your spreadsheet that contains the parameter listed horizontally. The column is the cell on the spreadsheet that contains the parameter listed v Spring 2010 NBA 5060 Lecture 10 & 11 – Valuation 1. Valuation Basics – DCF 2. Valuation Basics – Residual Income Model 3. Short-cut Residual Income Model using Analyst Forecasts Associated Readings Page 1 of 15
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Valuation Economic theory teaches that the value of any resources equals the present value of the returns expected from the resource, discounted at a rate reflecting the inherent risk & time value of the returns. The first financial model for common equity (and the basis for all models used today) is the dividend-discounting model: To simplify matters, however, the forecasting period is limited to a finite number of years, after which a simplifying assumption is used. In particular, if we forecast until the firm reaches ‘steady state’, then a perpetuity, or a perpetuity with a constant growth rate can be used (this is the familiar Gordon growth model): Page 3 of 15
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Note: to use this formula, the terminal value estimate has to be a perpetuity or have a constant growth rate . Discounted Cash Flow Valuation For DCF valuation of equity, simply apply the dividend-discounting model. The net amount of money a common equity holder receives from the firm in a year is the common dividends net of any equity issuance where they sent money back to the firm (where a stock repurchase is a negative equity issuance). Thus, the value of equity is simply computed as follows: Page 4 of 15
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What values do we assign to the parameters? (1) Explicitly forecast FCFE using pro-forma financial statements. (2) Terminal Growth Rate (g) represent growth in abnormal earnings in perpetuity. Growth in GDP is a good assumption for g because it assumes that, in steady state, the company’s growth keeps pace with growth in the economy. At a maximum, g cannot exceed the GDP growth rate or else the firm would subsume the entire economy. Note that the forecasted financial statements in year T should equal the projected accounts in year 10, growing at your projected
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Lecture 10 & 11 spr 10 - BVEcellTheyour free the...

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