5 Questions
Which two general approaches are commonly used for stock valuation?
Present value of cash flows and relative valuation techniques
What are the two methods of present value of cash flows?
DDM and FCFE/FCFF
What does DDM assume about the dividend growth rate?
It will increase at a constant rate
How can the required rate of return (k) and growth rate (g) be calculated for DDM?
Based on asset pricing models and past dividend increases, respectively
What does FCFF consider in its calculation?
Operating free cash flow of total firm
Study Notes
- Two general approaches to stock valuation: present value of cash flows and relative valuation techniques.
- Present value of cash flows includes DDM and FCFE/FCFF.
- DDM assumes constant dividend growth rate.
- Required rate of return (k) and growth rate (g) can be calculated based on asset pricing models and past dividend increases, respectively.
- FCFE determines free cash flow available to stockholders after payments to all capital suppliers and growth of firm.
- FCFF considers operating free cash flow of total firm.
- Discounted cash flow method (FCFF) calculates future cash available to investors and its present value based on WACC and growth rate.
- Equity value is present value of FCFF minus value of firm's debt obligations.
- FCFF = Cash flow from Operations - Capital Expenditure + Interest Expense (1-Tax Rate).
- FCFF is used to calculate equity value and share price.
Are you familiar with the different methods used for stock valuation? Take this quiz to test your knowledge on the present value of cash flows and relative valuation techniques. Learn about the dividend discount model (DDM) and free cash flow calculations for equity (FCFE) and total firm (FCFF). Explore how required rates of return and growth rates are calculated, and how the discounted cash flow method is used to determine future cash available to investors. Challenge yourself with questions on equity value and share price calculations using
Make Your Own Quizzes and Flashcards
Convert your notes into interactive study material.
Get started for free
