ch12.BA440 - Firm Value Ch 12 What is a firm worth Firm...

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Firm Value 06/05/2008 Ch. 12
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2 What is a firm worth? Firm Value is the future cash flow to each of the claimants (Cash is King) Shareholders Debt holders Government When we talk of value of an asset…it is the price two independent agents are willing to exchange the asset at an arm’s length Neither are forced to complete the transaction The price reflects the value to the two parties For a real asset it is the characteristics of the asset For a financial asset it is simply the cash flows or the rights to the cash flows
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3 Firm Valuation Determining the cash flow to the owner… Four Methods Efficient Market Approach, take trading price of the share x number of outstanding shares Discounted Cash Flow Approach I CF to Equity discounted at cost of equity (FCFE) Discounted Cash Flow Approach II CF to Firm discounted by WACC (FCFF) Relative Value Use financial ratios to determine value In Theory all four methods should give same value
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4 Firm Value in an Efficient Market From the perspective of the owner Value of the firm is the price of the shares times the outstanding shares Example, 3M Current price per share is $76.51 (as of close of business 6-4-2008) Shares outstanding 704,290,000 (as of close of business 6-4-2008) Value = $53,779,580,000 Is the market right (value to equity holders)?
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5 Firm Value DCF Approach l Discount all future cash flows to equity holders Method A – Dividends are all future cash flow Method B – Find Free Cash Flow to Equity (FCFE) Assumption of models… Growth rate is needed Growth rate may be different over time High Growth Period Stable Growth Period
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6 Quick Review of Dividend Model Gordon’s Dividend Growth Model
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This note was uploaded on 05/15/2011 for the course ECON 101 taught by Professor 12 during the Spring '11 term at Harry S. Truman College - CCC.

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ch12.BA440 - Firm Value Ch 12 What is a firm worth Firm...

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