planning

planning - 1. Valuation models 1) To equity holders a....

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1. Valuation models— 1) To equity holders— a. Dividend discount model— a) Dividend—net cash flow to investors = dividends + buybacks – contributions from owners OR = operating cash flows – capital outlays + net cash flows from debt b) Constant dividend growth rate model— When g is constant, b. Abnormal earnings model— a) Abnormal earnings— Those that differ from the expected return; b) Equity value = BVE 0 (‘book value of equity’) + PV of expected future abnormal earnings 2) To the whole firm (enterprise value)— a. Free cash flow model— a) This model is based on the dividend discount model, but the cash flows are free cash flows to ALL INVESTORS; b) FCF to the whole firm— = cash flow from operations – investment OR = cash flow to creditors net of tax + cash flow to owners b. Abnormal earnings model— a) Abnormal earnings— The extra return to all investors; b) Equity value = Net operating assets + sum of [net operating assets / (1 + weighted average cost of capital) r ] Where, NOA = total assets – operating liabilities NOI = NI + (1 – tax rate) * Income + Preference dividends ANOI = NOI – r w * NOA
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3) Terminal value— a. Necessity to include it— a) To be included at the end of the forecast horizon; b) After the terminal year, growth is assumed to be constant in perpetuity; c) The terminal growth rate should not exceed the discount rate; b. Magnitude— a) If g is negative, it means that value flows are decaying and the firm will liquidate in the next period; b) A small error in terminal value will have a big impact on the valuation; 4) Cost of capital—
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This note was uploaded on 05/30/2011 for the course ACCT 7107 taught by Professor Xu during the Spring '11 term at UNI.

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planning - 1. Valuation models 1) To equity holders a....

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