Finance - Chapter 9: Cash flows for Stockholders (...

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Chapter 9: Cash flows for Stockholders Multiyear Investor Dividend Discount Model ( w/o the P if you assume it will be held forever) Constant Dividend Growth Two Stages Growth Initial growth period, where stock grows at g 1 for t years. After t years the stock grows at g 2 in perpetuity Total Return (w / continuous growth) Growth = Return on New Investment x Retention Ratio Retention Ratio = 1- Dividend Payout Ratio Sustainable Growth This is the maximum rate at which a company can grow without issuing equity, and without increasing its financial leverage. Sustainable growth rate 1 = ROE x (1- dividend payout ratio) = ROE x retention ratio Discounted Free Cash Flow Model Enterprise Value (EV) = MV of equity + Debt – Cash Free Cash Flow (FCF) = EBIT *(1-Tax Rate) + Depreciation – Increase in Net Working Capital – Capex Discounting the FCF by the weighted average cost of capital (WACC) gives the enterprise value. Theoretical forward PE ratio
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Finance - Chapter 9: Cash flows for Stockholders (...

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