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Managerial
Finance
Lecture 7
Interco

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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
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