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Another Example:ABC stock has an expected ROE of 12% per year, expected earnings per share of $2, and expected dividends of $1.50 per share. Its market capitalization rate is 10% per year.What are its expected growth rate, price, P/E, and PEG ratio?
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Price-to-book ratio Price-to-cash flow ratio Price-to-sale ratio 22 Other Comparative Valuation  Ratios
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23 Free Cash Flow Model An alternative approach to the DDM for firm valuation is to use free cash flow.  This approach is particular useful for  firms that pay no dividends . Free Cash Flow for the Firm (FCFF): ( 29 FCFF EBIT 1 Depreciation Capital expenditures Increase in NWC c t = - + - - ( 29 ( 29 1 FCFF Firm value 1 WACC 1 WACC T t T t T t P = = + + + EBIT = earnings before interest and taxes where = the corporate tax rate NWC = net working capital c t 1 FCFF , assuming a constant-growth model WACC estimate of terminal value where WACC weighted average cost of capital T T T P g P + = - = =
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Example:The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60 and the increase in net working capital is $30. What is the free cash flow to the firm?
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25 Comparing the Valuation Models
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Value by comparable q  P/E, P/B, P/Cash, Tobin’s Q Value by expected dividend growth q  DDM q  Constant-growth DDM  (Gordon Model) q  Two-stage DDM Value by P/E ratio q  Price= (expected P/E) * (expected E) q  P/E ratio  measures  growth opportunity (PVGO) Value by expected cash flow q  Free Cash Flow model 26 Summary
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