A Review of Valuation Tech - 13-1-09
A Review of Valuation Tech - 13-1-09
A Review of Valuation Tech - 13-1-09
A Review of
VALUATION TECHNIQUES
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VALUATION TECHNIQUES
Dividend Discount Model (DDM) Method Discounted Cash Flow (DCF) Method Net Tangible Asset (NTA) Method Relative Valuation Methods
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DCF Method
General Formula
CF1 CF2 CF3 CF4 CFn ..... (1 + r)1 (1 + r) 2 (1 + r) 3 (1 + r) 4 (1 + r) n
Value of asset =
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DDM Method
- Two-Stage DDM
t=n
t=1
DPSt
(1+ ke)t
Pn
(1+ ke)n
where
Pn
DPSn+1
=
ke g n
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Free Cash Flow to Equity (FCFE) Free Cash Flow to Firm (FCFF)
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FCFE
Net Income (after taxes) + Non-cash charges (Depn & Amortizn) - Capital expenditures - Changes in Net Working Capital + Net changes in long-term Debt = Free Cash Flow to Equity
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FCFF
Net Income (after taxes) + Non-cash charges (Depr. & Amortizn) - Capital expenditures - Changes in Net Working Capital + Interest expense (net of taxes) + Preferred dividends = Free Cash Flow to Firm
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Cost of Equity, ke
The Cost of Equity is usually derived from the Capital Asset Pricing Model (CAPM), which is as follows:-
Ke = Rf + (Rm Rf)
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(Rm Rf) is the market risk premium is the measure of volatility of the individual asset in relation to the overall market
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Two components:-
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Computation of EV Multiple
Key Elements: Enterprise Value = Total Market Capitalization + Total Debts + Minority Interest + Preferred Shares - Cash EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization or Net Operating Income
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