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when constrained to using only prior earnings data, a reasonable forecast of earnings for quarter t includes the following elements: -The earnings of the comparable quarter of the prior year (Qt-4) -a long-run trend in year-to-year quarterly earnings increased (δ) -a fraction (φ) of the year-to-year increase in quarterly earnings experienced most recently (Qt-1 – Qt-5).For most firms the parameter tends to be in the range of 0,25 to 0,5, indicating that 25 to 50 percent of an increase in quarterly earnings tends to persist in the form of another increase in the subsequent quarter. The parameter reflects in part the average year-to-year change in quarterly earnings over past years, and it varies considerably from firm to firm. Verspreiden niet toegestaan | Gedownload door Duco Dekker ([email protected])lOMoARcPSD
- 29 -Chapter 7: Prospective Analysis: Valuation Theory and Concepts This chapter focuses on valuation theory and concepts. Valuationis the process of converting a forecast into an estimate of the value of the firm's assets or equity. Investment bankers commonly use five to ten different methods of valuation: discounted dividends; discounted cash flow analysis (DCF); Discounted abnormal earnings, discounted abonormal earnings growth; valuation based on price multiples. In this chapter valuation is illustrated using an all-equity firm to simplify the discussion. Defining value for shareholders Shareholders receive cash payoffs from a company in the form of dividends, the value of their equity is the present value of future dividends re = cost of equity capital If a firm had a constant dividend growth rate (gdiv) indefinitely, its value would simplify to the following formula: The above valuation formula is called the dividend discount model. The dividend discount model is not a very useful valuation model in practice. This is because equity value is created primarily through the investment and operating activities of a firm. Within a period of five to ten years, which tends to be the focus of most prospective analyses, dividends may therefore reveal very little about the firm's equity value. The discounted cash flow model The value of an asset or investment is the present value of the net cash payoffs that the asset generates. This model is the sum of the free cash flows to debt and equity holders discounted at the weighted average cost of debt and equity (WACC). Asset value = PV of free cash flows to debt and equity claim holders = OCF1- Investment1/ (1+WACC) + OCF2- Investment2/ (1+WACC)2+ ... OCF=PV of cash flows generated by the assets The cash flows that are available to equity holders are the cash flows generated by the firm's net assets minus capital outlays, adjusted for cash flows from and to debt holders, such as interest payments, debt repayments and debt issues. Capital outlays are capital expenditures less asset sales. Finally, net cash flows from debt owners are issues of new debt less retirements less the after-tax cost of interest.
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Balance Sheet, Verspreiden niet toegestaan, Duco Dekker, door Duco Dekker, Gedownload door Duco