EFN406 Lecture 03 2009

EFN406 Lecture 03 - 2009 EFN406 Managerial Finance Slide1 EFN406 Managerial Finance EFN406 Managerial Finance Valuation of Debt and Equity Topic 3

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Unformatted text preview: 2009 EFN406 Managerial Finance Slide1 EFN406 Managerial Finance EFN406 Managerial Finance Valuation of Debt and Equity Topic 3 Topic 3 2009 EFN406 Managerial Finance Slide2 Reading Reading • Valuation PBEHP, Ch 4 , exclude appendix 2009 EFN406 Managerial Finance Slide3 Valuation Models Valuation Models • Valuation in Finance • Perpetuity • Constant Growth • Standard Model • Free Cash Flow Model • Earnings Multiplier 2009 EFN406 Managerial Finance Slide4 Theory of Value Theory of Value • General Model ∑ ∞ = + = 1 ) 1 ( t t t k C F P 2009 EFN406 Managerial Finance Slide5 Interpretation Interpretation • When you purchase an asset or security you are paying a price today for a series of future cash flows • given time value of money then it makes sense to value the security as the present value of all future cash flows • the discount rate used should reflect the risk involved - higher the risk the higher the rate 2009 EFN406 Managerial Finance Slide6 Shares - Equity Shares - Equity • applying this idea to shares • the future cash flows are dividends • for going concern dividends go to infinity • Method used depends on pattern of CFs • simplify – perpetuity – constant growth – standard model 2009 EFN406 Managerial Finance Slide7 Perpetuity Perpetuity P D k e = Where P o = price time zero (now) D = constant dividend k e = cost of equity Apply to perpetual bonds, non-redeemable preference shares 2009 EFN406 Managerial Finance Slide8 Perpetuity Example Perpetuity Example What is price of a non-redeemable preference share which pays a constant dividend of 20% pa on a par value of $2.00 if the discount rate (required rate of return) is 10%?...
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This note was uploaded on 09/15/2010 for the course BUSINESS 406 taught by Professor John during the Three '10 term at Queensland Tech.

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EFN406 Lecture 03 - 2009 EFN406 Managerial Finance Slide1 EFN406 Managerial Finance EFN406 Managerial Finance Valuation of Debt and Equity Topic 3

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