
book value, which is based on the amount paid for the asset. Following the stock market crash of 1929, discounted cash flow analysis gained popularity as a valuation method for stocks. Irving Fisher in his 1930 book "The Theory of Interest" and John Burr Williams's 1938 text 'The Theory of Investment Value' first formally expressed the DCF method in modern economic terms. [edit] Mathematics [edit] Discounted cash flows The discounted cash flow formula is derived from the future value formula
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to apply the techniques to evaluate a real company, some practical problems may appear. This study summarizes the most important practical difficulties which may hinder the valuation process and proposes different ways of solving these. Beyond the theoretical discussion, the author illustrates the techniques with a casestudy, using the financial figures of a fictive firm. Keywords: company valuation; discounted cashflow methods; The Practical Application of Discounted CashflowBased
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outstanding using the treasury stock method Modeling the weighted average cost of capital (WACC) Sensitivity analysis using data tables Modeling synergies ***************************** SAMPLE PAGES FROM TUTORIAL GUIDE ***************************** DCF in theory and in practice DCF in theory • The DCF valuation approach is based upon the theory that the value of a business is the sum of its expected future free cash flows, discounted at an appropriate rate. • Discounted cash flow (DCF) analysis
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FIN 751 – CORPORATE FINANCIAL POLICY & STRATEGY, FALL 2012 INSTRUCTOR: TOM BARKLEY CASE #2 – “Groupe Ariel: Parity Conditions and CrossBorder Valuation” Written reports are to be no more than five typed pages (based on a 12point Times New Roman font, doublespaced, with 1inch margins all around). The assignments are due at the beginning of class on Thursday, November 8, 2012. This case is designed to introduce discounted cash flow valuation techniques in a crossborder setting
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are particularly interested in) is then computed by comparing the fair value with the current market price of the company´s share. The basic formulation of Discounted cash flow valuation is as follows: • Free cash flow to firm is discounted with WACC to the Year 0 (the forecast year) in order to get the present value of free cash flows. • Cumulative discounted free cash flow is a yearly item in which all the forecast years´ discounted cash flows are summed up. Hence, the first item is the sum of all
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CHAPTER 4 DISCOUNTED CASH FLOW VALUATION Solutions to Questions and Problems 10. To find the future value with continuous compounding, we use the equation: FV = PVeRt a. b. c. d. FV = $1,000e.12(5) FV = $1,000e.10(3) FV = $1,000e.05(10) FV = $1,000e.07(8) = $1,822.12 = $1,349.86 = $1,648.72 = $1,750.67 23. We need to find the annuity payment in retirement. Our retirement savings ends at the same time the retirement withdrawals begin, so the PV of the retirement withdrawals
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a constant expected growth rate, g, and a constant debtequity ratio, to calculate the discounted cash flow value of the cash flows from time T+1 to infinity, valued at time T: Enterprise Value in Year T = VTL = FCFT +1 rwacc − g Another method of determining the terminal value is to use a valuation multiple based on comparable firms. It is informative to use both the discounted cash flow approach and the multiples approach when estimating a realistic terminal value estimate. While the NPV
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the value held by a firm’s equity holders; it should not be confused with Enterprise Valuation, which is the total value of a firm. They are two different values from two different concepts. By having a clear understanding of it, we will be able to incorporate the appropriate cash flows and discount rates to our valuation analysis. Analysis Discounted Cash Flow Models This models measure the value of equity by discounting the cash flows a firm generates for its equity holders, dividends
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Q.1 Describe the key issues that need to be considered in valuing AirThread Connections. In particular, the following issues must be considered: Valuation of cash flows in the relevant period Estimating terminal value A. Procedure 1. The cash flows (without synergy) were taken as provided for 5 years along with adjustment for Net working capital changes. 2. WACC was calculated for various D/V ratios 3. Terminal Value of the firm was determined using P/E Multiple of 19.1 4. Valuation done
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Relative Valuation Why is valuation required? It helps us to take investment decisions. * If Estimated Value > Market Price, Buy * If Estimated Value < Market Price, Don’t Buy How can equity be valued? * DDM * Relative Valuation * CAPM In discounted cash flow valuation, the objective is to find the value of an asset, given its cash flow, growth and risk characteristics. In relative valuation, we value an asset based upon how similar assets are currently priced in the market
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to be included. The cash flows must then be discounted at the aftertax cost of capital. UK companies that are not classed as ‘small’ for tax purposes pay their annual corporation tax in four installments spread across the year, so they have a cash outflow for tax every three months. For such companies the usual assumption in cash flow planning is that the tax outflow takes place in the year in which the profit is earned. The test of being ‘small’ is based on the amount of taxable profit
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extension merger  Two companies selling different but related products in the same market. ■ Conglomeration  Two companies that have no common business areas. METHODS OF VALUATION FOR MERGERS AND ACQUISITIONS Here, I have shown the detailed description of the discountedcashflow (DCF) approach and other methods of valuation, such as market multiples of peer firms, book value,liquidation value, replacement cost, market value, and comparable transaction multiples. DiscountedCashFlow Method
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TUTORIAL 7 – Discounted Cash Flow Valuation I {Ross chapter 5: Critical thinking 1; Questions 4, 5, 7} Critical Thinking Question 5.1 – Annuity Period As you increase the length of time involved, what happen to the present value of an annuity? What happens to the future value? duration increase, present value decrease (indirect relationship) duration increase future value increase (direct relationship) Assuming positive cash flow and a positive interest rate, both the present
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is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report. * Executive Summary xxxxxxxxxxxxxxxxxxxxx 1 Company Overview 2 Valuation Methods Used 3 Fundamental Valuation 4 Market Valuation 5 Liquidation Value Fundamental Method: Discounted Cash Flows The Fundamental Method consists in calculating the cash flows the company will produce in the future and discounting them to the present in order to determine the present value
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is a reflection of the present value of the benefits and liabilities of that asset or business. To use the DCF approach, add the firm’s expected dividend growth rate to its expected dividend yield. See the formula below: Rs=D1/P0 + Expected g The discounted cash flow approach represents the net present value of project cash flows available to all providers of capital, net of the cash needed to be invested for generating the projected growth. The concept of DCF valuation is based on the...
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of Capital(WACC) which determines the scale of the value of our target company. Key informations such as dept to equity ratio, the amount of total debt, tax rate, interest rate for borrowings, free cash flows(Net Cash Provided by Operating Activities minus Net Cash Used in Investing Activities), share price and the number of issued shares can be found from the annual report 2011. 2. Valuation Methodology To introduce Terminal Value method, Discounted cash flow (DCF) method is necessary to discuss
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When attempting to determine the valuation of LinkedIn it helps to understand some of the issues involved. The most accurate way to value a stock’s price is using discounted cash flows. The problem with this approach is that it is nearly impossible to predict with any accuracy what the longterm cash flows are for a given company; especially a company that is young or that might be using an innovative and new business model. Additionally, knowing what longterm cash flows look like requires
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Concepts of business valuation – Critical review of the Discounted Cash Flow (DCF) analysis and its applicability in today’s business world SEMINAR PAPER Table of contents page 1. Introduction...............................................................................................................3 1.1 1.2 2. The importance of business valuation ..................................................................3 Key indicators covered in this seminar paper
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: the result is that it has to include and exclude some items that are not taken into account in the traditional methods. In Part II a comparison between the proposed method to construct the abovementioned cash flows and the ones found in the current and typical textbooks is presented. KEYWORDS Free cash flow, cash flow to equity, cash flow to debt, project evaluation, firm valuation, investment valuation, Net Present Value NPV assumptions. JEL Classification: D92, E22, E31, G31 1
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Valuation models Discounted cash flow models: Dividend discount Free cash flow to the firm Residual income Multiplesbased valuation: Priceearnings ValueEBITDA ValueEBIT ValueSales PriceBook value Equity valuation In conjunction with the valuation of Coles Group, contained in “Excel03 Equity valuation” Real options valuation Equity markets price shares above the present value of expected future cash flows, due to the presence of embedded options not captured by DCF analysis
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CORPORATE FINANCE CASE STUDY SUPERMAR VALUATION Question 1  Find SUPERMAR’S current firm and equity values under the following capital structure scenarios: In order to calculate the cash flows the first step is to calculate the necessary inputs for the WACC. The case indicates that the current capital structure is 14% debt. We have all of the other inputs needed to calculate the cost of equity, cost of debt and WACC. The inputs are the following: Before, calculating the actual
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valuation method actually underestimates the real value of MW acquisition. If Apache defers the exploiting of the reserves, there exists a possibility for the future cash flows becoming even more valuable. For example, Apache could have more precise information about the value of the cash flows from reserves. In addition, Apache might have more accurate information about the amount of oil that the reserves contain or about the development of oil prices in the future. This opportunity to obtain
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APRIL 2010 ST R I C T L Y P R I VAT E AN D C O N F I DEN T I AL INTRODUCTION TO VALUATION Presented by Tristan Fitzgerald Overview of the session Introduction Discounted cash flow (“DCF”) Trading multiples I N T R O DU C T I O N T O VAL U AT I O N Transaction multiples 1 What does the term “value” mean?1 The Oxford Dictionary definition “the material or monetary worth of a thing; the amount at which it may be estimated in terms of some medium of exchange or other
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attributed to the use of the DCF model as a tool to merely motivate an investment recommendation and not derive a correct theoretical value. Tutor: Professor Peter Jennergren3 Discussants: Gustav Ohlsson, Fredrik Toll and Carl Wessberg Presentation: June 5, 2008, 15:15 am Venue: KAW, Stockholm School of Economics Key words: corporate valuation, discounted cash flow model, free cash flow, valuation 20084@student.hhs.se 20103@student.hhs.se 3 We would like to thank our tutor, Professor Peter
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MASTER IN ECONOMICS OF BANKNG AND FINANCE MEBF 5th ______________________________________________ SUBJECT: COMPANY VALUATION CASE STUDY: BIOTECHNOLOGY S.A Prepared by: Tran Ngoc Minh (MEBF 5th) Assignment: Company Valuation Case Study: BioTechnology Student: Tran Ngoc Minh – MEBF 5th TABLE OF CONTENT I. Introduction of company valuation methods and process........................................................3 1. Abstract
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to calculate: the market value of debt is equal to the book value of debt. (Unless the debt trades and thus has a real “market value.” This information, however, is hard to come by, so it is safe to use the book value.) Figuring out the market value of equity is trickier, and that’s where valuation techniques come into play. The four most commonly used techniques are: 1. 2. 3. 4. Discounted cash flow (DCF) analysis Multiples method Market valuation Comparable transactions method Generally, before
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Methods of Valuation for Mergers and Acquisitions This note talks about the methods that can be used to value the companies. It makes a detailed description and definition of discountedcashflow. It also gives theories and approaches about other methods and techniques of evaluation, market value and cost. First of all, it is important to talk about the DiscountedCashFlow Method, this theory shows and describes the value of the company. This happens by computing the present value
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) Constant Growth DDM Differential Growth DDM 2. Earningbased Models Earnings Capitalisation without growth Earnings Capitalisation with growth PriceEarning Multiple Model 3. Free Cash Flow Models Discounted Free Cash Flow to Equity (FCFE) model Discounted Free Cash Flow to the Firm (FCFF) model 4. Book Valuation (Net Asset Value) Model Discounted Dividend Model The dividend discount model (DDM) is a method of valuing a company based on the theory that a stock is worth
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ANALYSIS FOR FINANCIAL MANAGEMENT 10TH Edition Robert C. Higgins Additional Problems Chapter 7 – Discounted Cash Flow Techniques page 247 A brief tutorial on Excel financial functions (problems to follow) You may find the following Excel, builtin financial functions helpful when analyzing the problems below. (To access these functions, select Insert, Functions, and choose Financial.) =PV(rate, nper, pmt, fv, type) returns the present value of a series of cash flows. =FV(rate
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the case in class (your answers, your analysis, etc.) 1 Valuation  Use NPV approach How to make investment decisions: 1. Estimate (expected) cash flows in each time period 2. Choose an appropriate discount rate 3. Use discounted cash flow analysis to calculate NPV 4. Make decision that maximizes NPV Fundamental principle: V(A+B)>V(A)+V(B) Value driver:1)Eliminate overhead 3) Leveragen brom dname Pay its=D(P)(PVC)FC V(Pinkerton after)+V(CPP after)>V(Pinkerton
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the discounted cash flow valuation of the deal using Adjusted Present Value. The question is “What is Pinkerton worth to CPP (Wathen’s sole proprietorship)?” The value of Pinkerton to CPP is made up of three parts: 1. the value of Pinkerton as a standalone firm (but including improvements brought to Pinkerton by new management) plus 2. the value of synergies brought to the old CPP due to now having the combined firm plus 3. the value associated with net “financingside” benefits associated
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present worth (NPW)[of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard
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MJBFIN Which of the following presents a summary of the changes in a firm’s balance sheet from the beginning of an accounting period to the end of that accounting period? The statement of cash flows. The statement of net worth. The statement of retained earnings. The statement of working capital. Efficiency ratio: Gateway Corp. has an inventory turnover ratio of 5.6. What is the firm's days's sales in inventory? 61.7 days 57.9 days 65.2 days 64.3 days Leverage ratio: Your
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Article 1discusses how different estimates of equity value are obtained by researchers while using the discounted cash flow model (CF) and the Residual income (RI) model. It recognises the inconsistencies prevalent while implementing them. Francis et al (2000) use Value line estimates for finite forecasting periods. They conclude that RI is superior to CF. Courteau et al (2000) analyse whether different valuation models are same when a terminal value calculation based on price is used
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; the present value of the asset’s expected future cash flows. SECURITY VALUATION In general, the intrinsic value of an asset = the present value of the stream of expected cash flows discounted at an appropriate required rate of return. Can the intrinsic value of an asset differ from its market value? Ct = cash flow to be received at time t. k = the investor’s required rate of return. V = the intrinsic value of the asset. BOND VALUATION Discount the bond’s cash flows at the investor’s...
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is not some magical creation that ebbs and flows like the tide; rather, it is the concrete representation of partial ownership of a publicly traded company. If XYZ Corporation has 1 million shares of stock outstanding and we hold a single, solitary share, that means we own a millionth of the company. There are some stock valuation methods that we can use in valuing company’s stock. For instance: Discounted Cash Flow Model (DCFM), Dividend Discount Model (DDM) and Earnings Growth Model (EGM).DDM
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How To Choose The Best Stock Valuation Method When trying to figure out which valuation method to use to value a stock for the first time, most investors will quickly discover the overwhelming number of valuation techniques available to them today. There are the simple to use ones, such as the comparable method, and there are the more involved methods, such as the discounted cash flow model. Which one should you use? Unfortunately, there is no one method that is best suited for every
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. These are: 1) Dividend Discount Model 2) Discounting Cash Flow Based Model 3) Balance Sheet Based Model 4) Income Statement Based Model (Relative valuation) 5) Valuation Using Multiples 6) Value Creation Methods 7) Option Pricing Methods Dividend Discount Model The Dividend Discount Model for valuing equity is the present value of expected dividends on the value of stock. When investors buy stock they generally expect to get two types of cash –flows: • Dividends during the period of the stock
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Cash Flows paper Cash flows are the flow of funds in and out of a company. The cash flows statement is one of four financials statements used by firms to report their financial position, including the balance sheet, income statement and statement of shareholders equity. The Cash flows statement is a statement that reports the flow of funds, the origin of the funds and how the funds are spent within a business. The cash flow statement can be recreated from information documented
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This case discusses the valuation of stocks and bonds. It says that in textbooks, the valuation of stocks and bonds is simply stated as the present value of all the future cash flows expected from the security. The concept is logical, straightforward, and simple. The valuation of bonds is usually presented first, since the relatively certain cash flows are broken into an annuity and a payment of the par value at some specific date in the future. Preferred stock valuation follows bond valuation
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Cash Flow Week 7 Checkpoint XACC/291 Cash Flow 2 Generally, two approaches are used to prepare the statement of cash flows direct and indirect method. Of both these methods, the direct method results in a more easily understandable report. The direct method for preparing statement of cash flows emphasizes on reporting major classes of gross cash receipts and payments. A method of creating a statement of cash flow during a given reporting period. This method uses the actual cash flow
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based on sales growth projections for the bearing industry (approximate average for U.S. growth and worldwide growth). We discounted the free cash flows using a calculated WACC of 9.44%, to arrive at a standalone valuation of Torrington of $617.06 million (see Exhibit 1). The valuation of Torrington with synergies is the prior standalone valuation less the $130 million in initial costs of the acquisition, which we chose to incur in the first and second years, and the 80 million annual synergies
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Cash Flows Aleshia Wisch ACC206: Principles of Accounting II Prof. Eric Sumners August 11, 2014 ACC 206 Week Assignment 1. Critical Thinking Question: Answer the following questions: Why are noncash transactions, such as the exchange of common stock for a building for example, included on a statement of cash flows? How are these noncash transactions disclosed? It is important for a company to show what assets they have on hand that can convert to cash. Non cash transactions
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dividends on the stock. According to the dividend growth model, an asset that has no expected cash flows has a value of zero, so if investors are willing to purchase shares of stock in firms that pay no dividends, they evidently expect that the firms will begin paying dividends at some point in the future. 2. Explain why some bond investors are subject to liquidity risk, default risk, and/or taxability risk. How does each of these risks affect the yield of a bond? Liquidity problems
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owt 93 Valuation of Different Types of Stocks Case 1: Zero Growth Assume that di id d will remain at the same level A h dividends ill i h l l forever Div 1 Div 2 Div 3 Since future cash flows are constant, the value of a zero growth stock is the present value of a perpetuity: Div 3 Div 1 Div 2 P0 1 2 3 (1 R) (1 R) (1 R) Div P0 R 94 Case 2: Constant Growth Assume that dividends will grow at a constant rate, g, h di id d ill forever, i.e
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To: Dr. Lynna Martinez Subject: Calaveras Vineyards Valuation As per your request, my associates and I have calculated a valuation for Calaveras Vineyards using the present value of cash flows. We used the valuation of future cash flows method in order to value to value the company. We have come to the conclusion, based on a number of future projections, that the best valuation of the vineyards is $4,356,000 in assets and $1,104,000 in equity. The process at determining this valuation
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Home Products stock and bond valuation HOME PRODUCTS  Case 9 STOCK AND BOND VALUATION In all textbooks, the valuation of stocks and bonds is simply stated as the present value of all the future cash flows expected from the security. The concept is logical, straightforward, and deceptively simple. The valuation of bonds is usually presented first, since the relatively certain cash flows are broken into an annuity and a payment of the par value at some specific date in the future
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, Discounted Payback Period, Profitability Index, and Return on Investment: In determining the value of capital projects, there are several valuation metrics at our disposal. In this case, we are presented with two mutually exclusive capital projects with different useful lives, and as such, there are certain criteria that are more useful than others. Payback period and discounted payback period both measure the number of years taken for future cash flows to cover the initial costs, yielding
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Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows Richard S. Ruback* This paper presents the Capital Cash Flow (CCF) method for valuing risky cash flows. I show that the CCF method is equivalent to discounting Free Cash Flows (FCF) by the weighted average cost of capital. Because the interest tax shields are included in the cash flows, the CCF approach is easier to apply whenever debt is forecasted in levels instead of as a percent of total enterprise value. The CCF method
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an evaluation through the Discounted Cash Flow method (DCF) and the multiples valuation method. The Discounted Cash Flow (DCF) method is possibly the most commonly used when assessing an investment opportunity. The DCF tells how much profit would you make and adjust it for the value of money. For this valuation is crucial to have the most information possible about the company to make good predictions of Cash Flows, which sometimes is not that easy to get. Multiples valuation is commonly known
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