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model3

model3

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Published by: gagan585 on Aug 07, 2008
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06/06/2010

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Aswath Damodaran13
V. Beyond Inputs: Choosing andUsing the Right Model
Discounted Cashflow Valuation
 
Aswath Damodaran13
Summarizing the Inputs
n
In summary, at this stage in the process, we should have an estimate of the
the current cash flows on the investment, either to equity investors(dividends or free cash flows to equity) or to the firm (cash flow to thefirm)the current cost of equity and/or capital on the investmentthe expected growth rate in earnings, based upon historical growth,analysts forecasts and/or fundamentals
n
The next step in the process is deciding
which cash flow to discount, which should indicatewhich discount rate needs to be estimated andwhat pattern we will assume growth to follow
 
Aswath Damodaran14
Which cash flow should I discount?
n
Use Equity Valuation
(a) for firms which have stable leverage, whether high or not, and(b) if equity (stock) is being valued
n
Use Firm Valuation
(a) for firms which have leverage which is too high or too low, and expect tochange the leverage over time, because debt payments and issues do nothave to be factored in the cash flows and the discount rate (cost of capital)does not change dramatically over time.(b) for firms for which you have partial information on leverage (eg: interestexpenses are missing..)(c) in all other cases, where you are more interested in valuing the firm thanthe equity. (Value Consulting?)

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