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FIN401-Chapter13 notes

# FIN401-Chapter13 notes - 1 Construct pro forma income...

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FIN 401 – Principles of Investments and Security Markets Chapter 13: Equity Valuation

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Comparables Steps: 1. Select the universe of comparable companies 1. Business: industry, products, who we sell to (end markets), Geography 2. Financial: size, risk (capital structure-use of debt vs. equity), growth opportunities, profitability 2. Locate the necessary financial information 1. Financial information providers (Bloomberg, yahoo finance), company filings w/ SEC (10-K’s), analyst reports, credit rating agencies, 3. Calculate key statistics, ratios, and trading multiples 4. Benchmark the comparable companies 5. Determine valuation 2
Comparables Pros: Market-based Relativity Quick and convenient Current Cons: Market-based Absence of relevant comparables Potential disconnect from cash flows Company-specific issues 3

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Intrinsic Value 4
Dividend Discount Models 5

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Free Cash Flow Valuation Approaches Steps:

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Unformatted text preview: 1. Construct pro forma income statements 2. Calculate annual free cash flows during projection period 3. Calculate a terminal value 4. Calculate an appropriate discount rate 5. Calculate enterprise value and an implied share price 6 Free Cash Flow Valuation Approaches FCFF = EBIT*(1-t c ) + Depreciation – CapEx – Increases in NWC – What is the appropriate discount rate? FCFE = FCFF – Interest expense * (1-t c ) + Increases in net debt – What is the appropriate discount rate? Net Working Capital= Current Assets- Current Liabilities- Total non-cash current assets- Total Accurals 7 Free Cash Flow Valuation Approaches Pros: • Cash flow-based • Market independent • Self-sufficient • Flexible Cons: • Dependent on financial projections • Sensitive to assumptions • Terminal value • Assumes a constant capital structure 8...
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FIN401-Chapter13 notes - 1 Construct pro forma income...

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