Quiz 1
Name:
Quiz 1: Fall 1997
1. You have been asked to assess the implied risk premium on the Timbuktu Stock
Exchange (TSE). The index is trading at 1050, and the dividend yield is 3%. The current
long term bond rate is 6.5%, and the expected long term
ThreeStageDividendDiscountModel
THREE-STAGE DIVIDEND DISCOUNT MODEL
This model is designed to value the equity in a firm with three stages of
growth - an initial period of high growth, a transition period of declining
growth and a final period of stable g
Value Enhancement: Back to Basics
Aswath Damodaran
146
Price Enhancement versus Value
Enhancement
Aswath Damodaran
147
Discounted Cash Flow Valuation: The Steps
n
Estimate the discount rate or rates to use in the valuation
Discount rate can be either a c
Gordon Growth Model
GORDON GROWTH MODEL
This model is designed to value the equity in a stable firm paying
dividends, which are roughly equal to Free Cashflows to
Equity.
Assumptions in the model:
1. The firm is in steady state and will grow at a stable r
OPTIONWORKSHEET:LONGTERMOPTIONS
VALUING AN OPTION TO DELAY A PROJECT
This program calculates the value of the option to delay making an investment.
Inputs relating the underlying asset
Enter the present value of cash flows from investing in project now =
An Introduction to Valuation!
Spring 2012
Aswath Damodaran
Aswath Damodaran
1
Some Initial Thoughts!
" One hundred thousand lemmings cannot be wrong"
We thought we were in the top of the eighth inning,
when we were in the bottom of the ninth.
Sta
Sheet1
There are three ways in which you can estimate the capital expenditures, especially in stable growth.
Approach 1: Assume Net Capital Expenditures are zero. (Cap Ex is 100% of Depreciation)
This approach, which is the most widely used in DCF valuati
Equity Value and Per Share Value: A Test
n
Assume that you have done an equity valuation of Microsoft. The total
value for equity is estimated to be $ 400 billion and there are 5 billion
shares outstanding. What is the value per share?
Aswath Damodaran
15
Dividend Discount Model
Assumptions
1. The firm is expected to grow at a higher growth rate in the first period.
2. The growth rate will drop at the end of the first period to the stable growth rate.
3. The dividend payout ratio is consistent with the exp
Estimation of Current Cost of Capital
Inputs
Equity
Number of Shares outstanding =
Current Market Price per share =
Number of Warrants Outstanding =
Current Market Price per Warrant =
Current Beta =
Riskfree Rate =
Equity Risk Premium =
Debt
Book Value of
AnalysisofDividendPolicy
Objective 1. To compare how much a firm has returned to its stockholder historically (up to 10 years) with how much it could have returned.
2. To provide an assessment of project quality (ROE compared to cost of equity) and stock
Dividend Discount Model
Assumptions
1. The firm is expected to grow at a higher growth rate in the first period.
2. The growth rate will drop at the end of the first period to the stable growth rate.
3. The dividend payout ratio is consistent with the exp
Sheet1
Equity Multiples from a DDM
Enter the following inputs for the two-stage DDM (If you are using FCFE, compute the potential payout ratio = 1- FCFE/ Net Income)
Current Inputs
Current Earnings
$11,041.00
Book value of equity
$51,713.00
(in $ per shar
1
Value Creation and Enhancement: Back to the Future
Aswath Damodaran
Stern School of Business
44 West Fourth Street
New York, NY 10012
[email protected]
1
2
Abstract
In recent years, firms have turned to their attention increasingly to ways in which
TwoStageDividendDiscountModel
Two-Stage Dividend Discount Model
This model is designed to value the equity in a firm, with two stages of growth, an initial
period of higher growth and a subsequent period of stable growth.
Assumptions
1. The firm is expect
FCFF Stable Model
FCFF STABLE GROWTH MODEL
This model is designed to value a stable firm on the basis of
free cashflows to firm.
Please enter inputs to the model:
Current EBIT
$9,324.00
Current tax rate =
46.94%
Current Return on Capital =
(in currency)
7
Valuations
Aswath Damodaran
Aswath Damodaran
169
Companies Valued
Company
Model Used
Con Ed
Stable DDM
ABN Amro
2-Stage DDM
S&P 500
2-Stage DDM
Sony
Stable FCFE
Nestle
2-Stage FCFE
Brahma
3-Stage FCFE
DaimlerChrysler Stable FCFF
The Home Depot 2-stage FCF
Estimating Growth
Aswath Damodaran
Aswath Damodaran
1
Ways of Estimating Growth in Earnings
n
Look at the past
The historical growth in earnings per share is usually a good starting point
for growth estimation
n
Look at what others are estimating
Analys
I. Estimating Discount Rates
DCF Valuation
Aswath Damodaran
1
Estimating Inputs: Discount Rates
n
n
Critical ingredient in discounted cashflow valuation. Errors in
estimating the discount rate or mismatching cashflows and discount
rates can lead to seriou
1
What is the riskfree rate? A Search for the Basic Building Block
Aswath Damodaran
Stern School of Business, New York University
[email protected]
www.damodaran.com
December 2008
2
What is the riskfree rate? A Search for the Basic Building Block
In
Closure in Valuation: Estimating
Terminal Value
Aswath Damodaran
Aswath Damodaran
1
Getting Closure in Valuation
n
A publicly traded firm potentially has an infinite life. The value is
therefore the present value of cash flows forever.
t = CF
t
Value =
t
Estimating Equity Risk Premiums
Aswath Damodaran
Stern School of Business
44 West Fourth Street
New York, NY 10012
[email protected]
Estimating Equity Risk Premiums
Equity risk premiums are a central component of every risk and return model in financ
DISCOUNTED CASHFLOW VALUATION WORKSHEET
DISCOUNTED CASHFLOW VALUATION
Required rate of return inputs
Do you want to input the cost of equity directly ?
No
(Yes or No)
If yes, enter the cost of equity for use in valuation
(in percent)
If not, enter the fol