Valuation part 1
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Transcript of Valuation part 1
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ValuationPart 1
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Objectives • Firm and equity fair valuation methods
o Present value DCF methodo Constant free cash flow and dividend growth methods
• Drivers of equity value• The price / earnings ratio
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Value of Simple Corp
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Book Value Market or Fair Value
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Constant FCF Growth• In the case where FCF is assumed to grow at a constant
rate, gFCF, a simple formula is found from series convergence
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or
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Constant FCF Growth• As the spread
between the rate cost and cash flow growth rate narrows, convergence slows considerably
• As cash flow growth rate approaches the rate cost, the series does not converge
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Variable Growth Value
1 2 3 4 5 6 7 8 9 10 11 12 13 14
FCF
Years H
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Variable Growth Value
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0 1 H H+1 N
gFCF
Step 2Step 3
Step 1
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Dividend Discount Model• Method is most applicable to firms that have a high
dividend payout ratio
• Assume that last dividend is a total repurchase of the stock
i = 0 1 2 3 4 5 N
DIV1
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DIVN
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Equity Value Management• Explore the relationships between
o Earnings growtho Dividend payoutso Cost of equity o Fair value of equity
• Based on the Dividend Growth Model with constant dividend growth assumption
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Constant Growth Formulas
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Constant Growth Formulas
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Constant Growth Formulas
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Constant Growth Formulas
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Constant Growth Formulas