FINAL REVISION

Relative valuation
Absolute
models /
valuation models
Multiplier models

Discounted cash Share price

Asset-based Enterprise value
flow models multiples (P/S,
valuation multiples
(DCF) P/B)

Free cash flow to Free cash flow to

Dividend discount Residual income
equity model the firm model
model (DDM) model
(FCFE) (FCFF)

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 Lecture 5-6: FREE CASH FLOWS VALUATION
1. Definition of FCFF and FCFE
2. Distinguish the DDM and FCFs models
3. Conditions to apply FCFF and FCFE

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 Lecture 5-6: FREE CASH FLOWS VALUATION
4. Formulas to calculate firm value and equity value:

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 Lecture 5-6: FREE CASH FLOWS VALUATION
5. Formulas to calculate firm value and equity value with constant-
growth models:

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 Lecture 5-6: FREE CASH FLOWS VALUATION
6. Formula to calculate FCFF and FCFE
• FCFF = NI + NCC + Int(1 – Tax rate) – ΔFC – ΔWC+ Preferred Div
• FCFF = EBIT(1 – Tax rate) + Dep – ΔFC – ΔWC
• FCFF = EBITDA(1 – Tax rate) + Dep(Tax rate) – ΔFC – ΔWC
• FCFF = CFO + Int(1 – Tax rate) – ΔFC
• FCFE = FCFF – Int(1 – Tax rate) + Net borrowing

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Noncash Charges

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 Lecture 7: PRICE MULTIPLES
1. Describe rationales for and possible drawbacks to using
alternative price multiples and dividend yield in valuation.
2. Distinguish the method of comparables and the method based
on forecasted fundamentals as approaches using price multiples
in valuation

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 Lecture 7: PRICE MULTIPLES
Method based on comparables Justified- Method based on
forecasted fundamental

P/E • Trailing P/E

• Leading P/E
• Normalized P/E

P/B

P/S

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 Lecture 7: PRICE MULTIPLES
Method based on comparables Justified- Method based on
forecasted fundamental

P/CF

D/P • Trailing D/P

• Leading D/P

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 Lecture 8: ENTERPRISE VALUE MULTIPLES
1. Calculate the EV:
Enterprise Value = Market Value of common
+ Market Value of preferred stock
+ Market Value of debt
− Cash and short-term investments
2. Describe rationales for and possible drawbacks to using
EV/EBITDA in valuation.

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 Lecture 8: ENTERPRISE VALUE MULTIPLES
3. Calculate the justified EV/EBITDA:

4. Distinguish P/E and EV/EBITDA.

5. Describe the international considerations

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 Lecture 9: RESIDUAL INCOME VALUATION
1. Define the residual income
2. Calculate and interpret residual income:
• Residual income = Net income – Equity charge
• Residual income = NOPAT - Capital charge
= NOPAT – (Debt charge + Equity charge)
3. Describe the uses of residual income models.
4. Describe the strengths and weaknesses of residual income
valuation model
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 Lecture 9: RESIDUAL INCOME VALUATION
5. Calculate the intrinsic value:

Or:

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 Lecture 9: RESIDUAL INCOME VALUATION
6. Calculate single-stage residual income valuation:

7. Calculate multi-stage residual income valuation:

or

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THANK YOU!