firm Valuation - handout

# firm Valuation - handout - Valuation Calculating the Value...

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Valuation Calculating the Value of the Whole Enchilada

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Warm-up: work an old test question You have been asked to value TTT Company, which is currently experiencing rapid growth due to a recently approved new patent. Because of the current growth trend, you expect dividends to grow at a rate of 15% for the next three years. After this high growth period, you expect the dividends to grow at a rate of 4%. The required return on TTT is 9%. The firm just paid a dividend of \$2. The stock is currently selling for \$51. Is the stock correctly priced? If not, by how much is it over- or under-priced? a. Stock is correctly priced (allow 1\$ in rounding). b. The stock is underpriced by about \$4 or \$5 c.The stock is overpriced by about \$4 or \$5. d.The stock is overpriced by about \$8 or \$9.
Mind Map There are many circumstances which require the valuation of an entire firm. There are also several methods that we can use to calculate this value. The point of this chapter is to pull together concepts that we’ve already learned and apply them to firm valuation.

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Mind Map Learning Objectives: Identify the methods used in firm valuation Calculate values with DCF and Comparables Articulate the difficulties of each method Articulate the various caveats of valuation and identify the directional impact on value of each
Mind Map Key Words/Concepts: Replacement cost, DCF, Comparable Multiples Tangible vs. Intangible assets Gordon growth model FCFF and FCFE Firm value Control premium Liquidity discount

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Valuation Why?? Buy/sell Acquisition/divestiture Partnership trouble Understanding market Divorce
Three Methods Replacement Cost Cost to replace the firm Discounted Cash Flow (DCF) Discount the relevant CFs Comparables Comparison to known values

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Replacement Cost Approach Left-side (asset side) of Balance Sheet Tangibles: appraised/estimated value Intangibles: patents, customer list, reputation Much harder Right side Cost to re-finance the firm (issue equity, etc) Issues: Tangibles and finance costs are easy. The hard part is valuing the intangibles.
DCF The heart of finance Intuitively simple:

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DCF The heart of finance Intuitively simple: V firm = Σ CF t (1+k) t
DCF The heart of finance Intuitively simple: Process: estimate numerator (CF) and denominator (k) V firm = Σ CF t (1+k) t

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DCF The heart of finance Intuitively simple: Process: estimate numerator (CF) and denominator (k) Issue: Apples to apples?? CF and k must agree V firm = Σ CF t (1+k) t
We usually use some form of F ree C ash F low FCFF vs FCFE FCFF: ALL capital providers (debt and equity) FCFE: CF for the equity providers only Be careful to match CF with discount rate!! FCFF = EBIT– Tax + depr – ΔCapEx –

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## This note was uploaded on 10/23/2011 for the course BUS M 301 taught by Professor Jimbrau during the Fall '11 term at BYU.

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firm Valuation - handout - Valuation Calculating the Value...

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