Lect 07 fin221 - Managerial Finance Lecture 7 Interco 1...

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1 Managerial Finance Lecture 7 Interco
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2 Class 6: Summary Valuation of securities (bonds, stocks…): (a) Identify the relevant CFs (b) Identify the discount rate (c) Discount! (a) Identify the relevant CFs, (b) Identify the discount rate, (c) Discount! Stock valuation: uncertain cash-flows Cash flows: dividends, share repurchases and selling price (capital gain) Discount rate risk-free rate Discount rate = risk-free rate +risk premium that depends on equity risk (next week!) Valuation methodologies : Valuation Value is determined by the quality of investment projects (NPVs) 1. The dividend discount model: Stock price = PV(future dividends per share) 2. The total payout model: Equity value = PV(future dividends and repurchases) Stock price = equity value / # of shares 3 The discounted free cash flow model: 3. The discounted free cash flow Steps: (a) Forecast FCFs for a number of years (5-10 years) (b) Estimate a terminal value at the end of the forecasting period (c) Get equity value Equity value = PV(future FCF) + cash – debt Stock price = equity value / # of shares 2
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