Ch 8

managers are “_____” of shareholders,

agents

method of valuing common stock (2)

free cash flow model

dividend growth model

what is free cash flow

cash flow available for investors

what is wacc

rate of return required by investors

PV of expected cash flow

sources of value (2)

• value of operations

• nonoperating assets

order of claim

1. bondholders

2. preferred stockholders

3. common stockholders

value of operations = PV of FCF Discounted at WACC

constant growth formula

Find value of operations

what is horizon value

value of alll fcf discounted back to horizon

horizon value is also called

• terminal value

• continuing value

Part 1

Find Horizon Value

FCF = $220

WACC = 11.5%

G_L = 5%

Part 2

FCF = $220

WACC = 11.5%

G_L = 5%

1. The Horizon Value (HV5) is FCF from Year 6 and beyond, discounted back to Year 5.

2. The PV of HV5 is then discounted back to the beginning period.

3. The Value of Operations is the Present Value of all cash flows year 1 – 5

   ($460) plus the PV of HV5 ($2,064).

Part 3

Percent of Value Due to Long-term Cash Flows

why do public companies focus on quarterly earnings?

• change in quarterly earnings can signal changes in future cash flow

• managers bonuses

what does ROIC mean

return on invested capital

PV of dividend

find estimated stock value

D₀ = $2.00

r_s = 13%,

g_L = 6%

find Expected Stock Price 1 Year Later

D₀ = $2.00

r_s = 13%,

g_L = 6%

dividend yield formula Total return = dividend yield + capital gains yield.

dividend yield = dividend/price

capital gain yield formula

capital gain yield = new price - old price / old price

total return formula

Total return = dividend yield + capital gains yield.

rate of return formula

FCF model vs Dividend Growth Model

FCF

• more situations

• require forecasted f/s

Dividend Growth Model

• constant growth rate

• less than required return