Introduction to Firm Valuation. Equity vs. Firm Valuation. Value of Equity: The value of the equity stake in the firm, the value of the common stock for a publicly traded firm Value of Firm: The value of all investors who have claims on the firm. A General Valuation Model.
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-Changes in Net Working Capital
+New Debt Issues
Free Cash Flow to Equity
Equity Reinvest = Stable Growth Rate
Stable Period ROE
Net Operating Profit After Taxes
-Gross Capital Expenditure
-Change in net operating working capital
Free Cash Flow
NOPAT = EBIT(1-Tax Rate)
NOPAT is the amount of profit a firm would earn if it had no debt and held no financial assets.
g = (Reinvestment Rate)(ROC)
Variable High Growth Firms Stable Growth Firms tend to tend to
Risk be above-average risk be average risk
Dividend pay little or no dividends pay high dividends
Net Cap Ex have high net cap ex have low net cap ex
ROC earn high ROC earn ROC (excess return) closer to WACC
Leverage have little or no debt higher leverage