Valuation Basics and DCF Models

Cash flows from assets are considered prior to any debt payments but after the firm has reinvested to create growth assets.

You must subtract the value of all debt.

The value for equity will be lesser than the value derived from an equity valuation.

<p>The discount rate incorporates the cost of raising both debt and equity financing, weighted by their proportional usage.</p> Signup and view all the answers

<p>Present value represents the value of the entire firm, reflecting all claims on the firm.</p> Signup and view all the answers

<p>FCFE = Non-cash Net Income - (Cap Ex - Depreciation) - Change in non-cash WC - (Debt repaid - Debt issued)</p> Signup and view all the answers

<p>Expected FCFE is calculated as Expected net income multiplied by (1 - Equity Reinvestment rate), indicating how much of the net income is retained.</p> Signup and view all the answers

<p>The value of equity is the sum of the value of equity in non-cash assets and cash.</p> Signup and view all the answers

<p>The length of a high growth period affects the present value of FCFE during that time, influencing overall valuation.</p> Signup and view all the answers

<p>Stable growth refers to the scenario when net income and FCFE grow at a constant rate indefinitely.</p> Signup and view all the answers

<p>Intrinsic valuation is primarily based on the fundamentals or intrinsic characteristics of an asset, particularly its expected cash flows.</p> Signup and view all the answers

<p>DCF valuation estimates intrinsic value by calculating the present value of expected cash flows while adjusting for risk through a discount rate.</p> Signup and view all the answers

<p>The discount rate reflects the risk of the cash flows and is used to discount the expected cash flows of the asset over its life.</p> Signup and view all the answers

<p>You can either discount expected cash flows at a risk-adjusted discount rate or discount certainty equivalents at the risk-free rate.</p> Signup and view all the answers

<p>'IT' implies that if a factor does not affect expected cash flows or their riskiness, it will not impact the asset's value.</p> Signup and view all the answers

<p>Making estimates of future expected cash flows is crucial as uncertainty is not an excuse for avoiding valuation; being wrong is acceptable.</p> Signup and view all the answers

<p>For an asset to have value, it must have positive expected cash flows at some point during its lifetime.</p> Signup and view all the answers

<p>Certainty equivalents are guaranteed cash flows that replace expected cash flows, which can be discounted at the risk-free rate.</p> Signup and view all the answers

<p>The value of equity is overstated by $175 when cash flows are incorrectly discounted.</p> Signup and view all the answers

<p>The value of equity is understated by $260 due to the improper valuation method.</p> Signup and view all the answers

<p>This approach results in an overstated value of equity by $540.</p> Signup and view all the answers

<p>The cash flows represent firm pre-debt cash flows and equity after debt cash flows.</p> Signup and view all the answers

<p>The terminal value signifies the expected growth of the firm beyond the initial forecast period.</p> Signup and view all the answers

<p>Firms in this phase are assumed to grow at a constant rate forever.</p> Signup and view all the answers

<p>Expected growth in operating earnings is a key component of DCF valuation.</p> Signup and view all the answers

<p>Proper matching ensures that valuations are not overstated or understated and reflect true value.</p> Signup and view all the answers

<p>The cost of equity represents the rate of return demanded by equity investors.</p> Signup and view all the answers

<p>FCFF is calculated as after-tax operating income minus capital expenditures, depreciation, and the change in non-cash working capital.</p> Signup and view all the answers

<p>The factors deducted are capital expenditures, depreciation, and changes in non-cash working capital.</p> Signup and view all the answers

<p>The reinvestment rate is the portion of expected operating income that is needed to sustain growth.</p> Signup and view all the answers

<p>It determines the cost of equity, which is crucial for valuation models like the Dividend Discount Model.</p> Signup and view all the answers

<p>The value of equity is calculated as the value of operating assets and cash &amp; non-operating assets minus debt.</p> Signup and view all the answers

<p>The weighted average cost of capital is derived by averaging the costs of equity and debt weighted by their proportions in the overall capital structure.</p> Signup and view all the answers

<p>A higher retention ratio can lead to lower expected dividends, as more net income is reinvested rather than paid out.</p> Signup and view all the answers

<p>Stable growth signifies a phase where operating income and FCFF grow at a constant rate indefinitely.</p> Signup and view all the answers

<p>When FCFE grows at a constant rate, it indicates a relationship that helps in assessing the cost of equity for valuation.</p> Signup and view all the answers

<p>The components include the present value of FCFF projected during the high growth period.</p> Signup and view all the answers

<p>Steady state refers to the period when dividends grow at a constant rate forever, simplifying the valuation process.</p> Signup and view all the answers

<p>It signifies the duration during which dividends are expected to grow at an above-normal rate before transitioning to stable growth.</p> Signup and view all the answers