Professional Documents
Culture Documents
Can bring one double-sided crib sheet (any font; typed or hand-written)
Best of luck!
:
Term Project Report
Due December 2
See Course Outline and posted Note. Project contact: Stacey
Choy (CPA)
Use the company’s original financial statements
Use consolidated financial statements
On-line submission, including the report and the Excel file
with all calculations
Details in appendices
Short-Cut Methods
4. Multiples or comparables
Ultimately goal is to determine the value of the stock
Three Fundamental Approaches
o Discounted Dividends
o Equity Value = PV of expected future dividends
DIV 1 DIV 2 DIV 3
V ........
(1 re ) (1 re ) 2 (1 re ) 3
o Discounted Abnormal Value
o Equity Value = Book Value + PV of exp. abnormal earnings
NI1 re * BVE0 NI 2 re * BVE1 NI 3 re * BVE2
V BVE0 ........
(1 re ) (1 re ) 2 (1 re )3
o Discounted Free Cash Flows to Equity
o Equity Value = PV of exp. free cash flow to equity
Critical elements:
i. Estimate Discount rate
β (beta): systematic risk how much riskier a stock is compared to the market as a
whole
Spread or market risk premium: Extent to which the stock market outperformed risk-
free investments historically. 4-8% commonly used
Critical elements:
i. Estimate Discount rate, WACC (more later)
ii. Calculate “Free Cash Flows to Enterprise”
o Enterprise FCF = NI + Int(1-t) – Δ WC - capex + depr
o or CFO + Int(1-t) – Capex
i. Estimate Terminal Value for enterprise
WACC(continued):
o Simple or simplistic?
3. Simplified to
V ROE1 re ( ROE 2 re ) * BVE1 / BVE 0 ( ROE 3 re ) * BVE 2 / BVE 0
1 ........
BVE 0 (1 re ) (1 re ) 2 (1 re ) 3
Interpreting P/B Ratios
OR = (Value/Book)/ROE