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Class 15 - • DFCF(FCFF “indirect” firm approach o...

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Valuation How do we establish value of assets? Int. rate increases to reflect default risk o Goes up as your debt increases o Debt ceiling might not get raised for US o We might not be able to repay interest, default Techniques: o DCF approaches: DDM FCFE (direct) FCFF (indirect) o Relative valuation approaches: P/E of comparables Enterprise value/ EBITDA Majority vs. minority stake in firm: o For majority: Buying equity vs. buying assets o For minority: No change of control takes place DFCF (FCFE) “direct” equity approach: o NI + non cash exp. – cap. exp. o Increase in WC principal payments o Forecast year-by-year the free cash flows to equity holders Move away from dividends paid to actual earnings
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Unformatted text preview: • DFCF (FCFF) “indirect” firm approach: o Compute unlevered cash flows o Discount at WACC Incorporates financing, which is left out of unlevered cash flows) • Relative capitalized earnings approach: o P0 = “P/E multiple” x forecasted EPS for your firm o Use comparables for multiple o High risk: use low multiple o High growth potential: use high multiples o If you use proper comparables then it will be very rare to find drastically different P/ E multiples • EV/ EBITDA: see slides • Comparable transactions: o For mergers look at “premiums” paid for similar transaction...
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