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Unformatted text preview: Illustration 1.2 What Is the Value of a Firm? The discussion of the value of a firm may have seemed a bit abstract, more suited for discussions in economic theory than for the use of sophisticated investors. Not so, as a Smart Money column in Business Week illustrates. The column began by noting that investment analysts use a vast collection of tools to select stocks and one of their handier devices is the dividend discount model, or DDM: The DDM works on the premise that an investment is worth the present value of its future cash flows. So to value a stock, youll need the current annual dividend, a projected growth rate, and a discount rate. The Business Week column used Exxon to illustrate the necessary calculation. At the time, the annual dividend was $2.20, which can be obtained from a newspaper. Exxon was expected to grow at a 7 percent annual rate, according to Value Line Investment Survey. This information could also be obtained from a broker. To calculate the discount rate, the column used the current rate on long-broker....
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This note was uploaded on 08/30/2011 for the course MGE 302 taught by Professor Isse during the Fall '08 term at SUNY Buffalo.
- Fall '08