This preview shows pages 1–6. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
Unformatted text preview: Valuation of Common Stock
• Two General Approaches
– Discounted CashFlow Techniques
• – Relative Valuation Techniques
• – Present value of some measure of cash flow,
including dividends, operating cash flow, and free
cash flow Value estimated based on its price relative to
significant variables, such as earnings, cash flow,
book value, or sales See Exhibit 11.2 111 Exhibit 11.2 112 Valuation of Common Stock
• Both of these approaches and all of these
valuation techniques have several
common factors:
– – All of them are significantly affected by
investor’s required rate of return on the stock
because this rate becomes the discount rate
or is a major component of the discount rate;
All valuation approaches are affected by the
estimated growth rate of the variable used in
113
the valuation technique Why Discounted Cash Flow Approach • These techniques are obvious choices for
valuation because they are the epitome of
how we describe value—that is, the
present value of expected cash flows
– – – • Dividends: Cost of equity as the discount rate
Operating cash flow: Weighted Average Cost
of Capital (WACC)
Free cash flow to equity: Cost of equity as the
discount rate
114 Dependent on growth rates and discount • Why Relative Valuation
Techniques how the
Provides information about
market is currently valuing stocks
– – alternative industries – • aggregate market
individual stocks within industries No guidance as to whether valuations
are appropriate
– best used when have comparable entities – aggregate market and company’s industry
115 Discounted CashFlow
Valuation Techniques
• The General Formula
t =n CFt
Vj = ∑
t
t =1 (1 + k )
Where:
Vj = value of stock j
n = life of the asset
CFt = cash flow in period t
k = the discount rate that is equal to the investor’s
required rate of return for asset j,
116 ...
View Full
Document
 Spring '12
 DAVIDBRAY
 Valuation

Click to edit the document details