Chapter 11. AN INTRODUCTION TO VALUATION. Chapter 11 Questions. When valuing an asset, what are the required inputs? After we have valued an asset, what is the investment decision process? What are the tow major approaches to the investment decision process?
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AN INTRODUCTION TO VALUATION
Types of cash flows
Three cheers for the three-step process!
From of returns
Time period and growth rate of returns
We will consider the valuation of three important types of investments:
What are the cash flows?
V = PMT/Discount rate
V = Dividend/kP
kP = Dividend/Price
Vj = SCFt/(1+k)t
Simplifying assumptions help in estimating present value of future dividends
Vj = SDt/(1+k)t
Infinite Period DDM
V = D1/(k-g)
where D1= D0(1+g)
VFj = SOCFt/(1+WACCj)t
VFj = OCFt/(WACCj – gOCF)
VSj = SFCFt/(1+kj)t
VSj = FCFt/(kj – gFCF)
These techniques assume that prices should have stable and consistent relationships to various firm variables across groups of firms
1. Required rate of return on its equity (k)
2. Expected growth rate of dividends (g)
NRFR = [1 + RRFR] [1 + E(I)] – 1
g = (Retention Rate) x (Return on Equity)
ROE = NPM x TAT x FLM
EPSt = a + bt
ln (EPSt) = a + bt