Discounted Cash Flow Model

Discounted Cash Flow Model - Valuation: Discounted Cash...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
Valuation: Discounted Cash Flow Model
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Discounted Cash Flow Model Equates the value of company equity with the present value of future free cash flows to equity Free cash flows can be thought of as the cash available to shareholders after outlays for operations and financing have been made Discount rate is the cost of equity capital 2
Background image of page 2
DCF Framework Equates current stock price to the present value of all future expected free cash flows As you can see, it is very similar to the Dividend Discount Model 3 IV0 = CF1 1 + re CF2 (1 + re)2 + CF3 (1 + re)3 + CF4 (1 + re)4 + + …
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Balance Sheet Mechanics Assets = Liabilities + Stockholder’s Equity Split Assets/Liabilities into “Operating” and “Financial” to get: OA + FA = OL + FL + SE OA – OL = FL – FA + SE Net OA = Net FL + SE Net OA – Net FL = SE Therefore: Net Cash Flows from Operations – Net Cash Flows to Debt Holders = Net Cash Flows to Equity
Background image of page 4
Two Ways to Value Cash Flows Value equity directly in one step PV (Net OA – Net FL) = PV (SE) Discount rate is the cost of equity
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/21/2011 for the course BMGT 313F taught by Professor Seybert during the Fall '11 term at Maryland.

Page1 / 13

Discounted Cash Flow Model - Valuation: Discounted Cash...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online