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LECTURE THREE: COMPANY ANALYSIS I. MEASURES OF VALUE A. Book Value – original cost B. Liquidation Value – sum of pieces C. Replacement Cost D. Market Value – MV of debt + equity + … Tobin’s Q: Market ValueReplacement Value Although the balance sheet can give some useful information about a frim’s liquidation value or replacement value, expected future cash flows are a better indicator of the firm’s value as a going concern . II. INTRINSIC VALUE VERSUS MAREKT VALUE A. Intrinsic Value – present value of all cash payments to the investor including dividends and expected selling price. B. Market Value – Price x Number of shares C. Market Capitalization rate = consensus required return III. DIVIDEND DISCOUNT MODEL (DDM) = = ∞ ( ) ( + ) P0 t 1 E Div t 1 k t = = ( )( + ) + ( + ) - ( + ) P0 t 1NE Divt 1 k t DivN 1 gsus k gsus 1 k N If the initial N dividends grow at one rate (usually g 1 >g 2 ) and then the sustainable growth rate begins, this is called a two-stage dividend growth model. If all N dividends are growing at different rates and the sustainable growth applies to the nth dividend, we call this a n+1 stage dividend growth model. For any pattern between these two results,
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This note was uploaded on 07/30/2011 for the course FIN 511 taught by Professor Park during the Summer '08 term at University of Illinois, Urbana Champaign.

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