Equity Valuation
Valuation models
Discounted cash flow models:
Dividend discount Free cash flow to the firm Residual income
Multiples-based valuation:
Price-earnings Value-EBITDA Value-EBIT Value-Sales Price-Book 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 Real options valuation is introduced in FINM3401 Corporate Finance.
1
Dividend discount model (1)
E=
Dividend discount model (2)
Terminal valuen
∑ (1 + k ) = ∑ (1 + k )
Dt Dt t =1 t e t =1 e
∞
n
t
+
(1 + ke )t
Equity value under the assumption of constant growth (which necessarily incorporates an assumption of a constant REINVESTMENT RATE and a constant expected return on reinvested earnings): n
Equity value per share is the present value of expected future dividends. Typical process is to estimate expected dividends for an explicit forecast period of, say, 3 – 10 years before making some assumption about dividends thereafter. The present value of these dividends thereafter is referred to as the terminal value (the value which you would expect to sell the shares for at the end of the explicit forecast period). The most common assumption is that dividends continue at a constant growth rate thereafter. But you do not necessarily have to assume constant growth.
E=
∑ (1 + k ) + (k − g )(1 + k ) g = (1 − DPR ) × E ( ROE )
Dt
t =1 t e e e e
Dt (1 + g e )
n
Equity value under the assumption that a constant DOLLAR amount of earnings are reinvested in new projects (or “the simple growth model”):
E=
∑ (1 + k )
Dt
t =1 e
n
t
+
En +1 (1 − DPR ) × En +1 ⎛ E ( ROE ) ⎞ ⎜ + − 1⎟ ⎜ k ⎟ ke ke e ⎝ ⎠
(1 + ke )n
Free cash flow to the firm model (1)
V=
Free cash flow to the firm model (2)
Firm value assuming
Discounted cash flow models:
Dividend discount Free cash flow to the firm Residual income
Multiples-based valuation:
Price-earnings Value-EBITDA Value-EBIT Value-Sales Price-Book 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 Real options valuation is introduced in FINM3401 Corporate Finance.
1
Dividend discount model (1)
E=
Dividend discount model (2)
Terminal valuen
∑ (1 + k ) = ∑ (1 + k )
Dt Dt t =1 t e t =1 e
∞
n
t
+
(1 + ke )t
Equity value under the assumption of constant growth (which necessarily incorporates an assumption of a constant REINVESTMENT RATE and a constant expected return on reinvested earnings): n
Equity value per share is the present value of expected future dividends. Typical process is to estimate expected dividends for an explicit forecast period of, say, 3 – 10 years before making some assumption about dividends thereafter. The present value of these dividends thereafter is referred to as the terminal value (the value which you would expect to sell the shares for at the end of the explicit forecast period). The most common assumption is that dividends continue at a constant growth rate thereafter. But you do not necessarily have to assume constant growth.
E=
∑ (1 + k ) + (k − g )(1 + k ) g = (1 − DPR ) × E ( ROE )
Dt
t =1 t e e e e
Dt (1 + g e )
n
Equity value under the assumption that a constant DOLLAR amount of earnings are reinvested in new projects (or “the simple growth model”):
E=
∑ (1 + k )
Dt
t =1 e
n
t
+
En +1 (1 − DPR ) × En +1 ⎛ E ( ROE ) ⎞ ⎜ + − 1⎟ ⎜ k ⎟ ke ke e ⎝ ⎠
(1 + ke )n
Free cash flow to the firm model (1)
V=
Free cash flow to the firm model (2)
Firm value assuming