EFN412 Lecture 07 - EFN412 Advanced Click to edit Master...

Info iconThis preview shows pages 1–14. Sign up to view the full content.

View Full Document Right Arrow Icon
Click to edit Master subtitle style 9/15/10 EFN412 Advanced Part B Topic 7 (7) Equity Finance 2 Company Valuation Required Reading: PBEHP 10th ed. Ch.4 and 14 Alternative Reading: PBEHP 9th ed. Ch. 4 and 15 Background Reading: RTCWJ, 4th ed., Ch.17 11
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
9/15/10 Reading Lecture Notes. Tutorial Reading Guide and Exercises. Reading: PBEHP 10th edition, Ch.4 and 14. Reading: PBEHP 9th edition, Ch. 4 and 15. Background Reading: RTCWJ, 4th ed, Ch. 17 Background Reading: RTCWJ, 3rd ed, Ch. 18 See also the Excel spreadsheets on the Blackboard site. Additional Optional Reading: Principles of 22
Background image of page 2
9/15/10 Learning Objectives The aim of this topic is to familiarise students with different valuation techniques using: Free Cash Flow Methodology Match discount rates to cash flows under 4 different scenarios: Before debt/Before tax; Before debt/After tax; After debt/Before tax; After debt/After tax. 33
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
9/15/10 Presumed Knowledge Valuation of equity securities using dividend valuation models. Valuation of debt securities. WACC calculation using the “textbook” formula.
Background image of page 4
9/15/10 Outline Revision of valuation models from prior study. Free cash flow analysis. Dealing with inflation. What are we valuing? The principle of consistency. Multipliers.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
9/15/10 PART 1
Background image of page 6
9/15/10 Theory of Value General Model = + = 1 0 ) 1 ( t t t k CF P Po = price now; CFt = Cash flow at time t; k = cost of capital
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
9/15/10 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
Background image of page 8
9/15/10 Valuation of Equity (or 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
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
9/15/10 Perpetuity P D k e 0 = Where Po = price time zero (now) D = constant dividend ke = cost of equity Apply to perpetual bonds, non-redeemable preference shares
Background image of page 10
9/15/10 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%? Po = D/kp = .40/.1 = $4.00
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
9/15/10 Constant Growth Model P D k g o e = - 1 ( ) Where g = constant growth rate of dividends to infinity. ke > g for the model to work. Limitation - unlikely to find shares with growth pattern demanded by the model.
Background image of page 12
Constant Growth Model What is the value of a share which has just paid a dividend of 50 cents and has dividends expected to grow at 5% pa forever, given a required rate of 15%? Po = D1/ (k - g) = .5(1.05)/(.15-.05) =
Background image of page 13

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 14
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 51

EFN412 Lecture 07 - EFN412 Advanced Click to edit Master...

This preview shows document pages 1 - 14. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online