Completely revised and updated, this edition is the ideal book on valuation for ceos. Finance concepts used present value free cash flow gordon model. Eq 6 5 eq 6 6 or eq 6 7 where cf cash flow k discount rate n time periods, time 1 to t t time tv terminal value. The commonly used methods of valuation can be grouped into one of three general approaches, as follows. Assuming positive cash flows and a positive interest rate, the present value will fall. The model examined takes a strict view of equity cash flows and consider only dividends to be cash flows to equity. The discounted cash flow method of property valuation is a fairly new method and research in other english speaking countries indicated a trend towards the use of the dcf method in preference to the capitalization method despite an initial hesitance due to the perceived complexity of the method. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred.
An annuity stream of cash flow payments is a set of level cash flows occurring each time. Measurement, disclosure, and the impact on equity valuation 293 d. Deciding the appropriate cash flow for discounting and the companys economic balance sheet 5. These dividend discount models ddms represent the oldest variant of discounted cash flow models.
There are several tried and true approaches to discounted cash flow analysis, including the dividend discount model ddm approach and the cash flow to firm approach. Ubs global research valuation series discounted cash flow analysis august 1997 6 also be subtracted from the dcf value to calculate equity value. A simple approach to discounted cash flow valuation in finance. This video lecture, part of the series financial management by prof.
Ragan, does not currently have a detailed description and video lecture title. Valuation for mergers and acquisitions second edition barbara s. The interest rate on the loan is 6% per year with monthly compounding. Takes the total return perspective necessary for successful investment. Chapter 6 discounted cash flow valuation 145 future and present values of multiple cash flows thus far, we have restricted our attention to either the future value of a lump sum present amount or the present value of some single future cash. Dpv as discounted present value of future cash flow fv. Great care should be taken under these circumstances to ensure the correct discount rate is used. Itsdiscounted cash flow basic formula can be seen in equation 65. Interest earned on both the initial principal and the interest reinvested from prior periods. To access resources such as quizzes, powerpoint slides, cpa exam questions, and cpa simulations. Quizlet flashcards, activities and games help you improve your grades.
Future value with multiple cash flows corporate finance. Chapter 16 cash flow analysis and equity valuation 349 james a. Chapter 6 discounted cash flow valuation finance 325 leila zbib learning objectives know the different types of. Chapter 6 financial reporting and tax considerations. Hopkins reprinted from the research foundation of cfa institute august 2000. Valuation and common sense 7th edition, 2019, 24 chapters. Itsdiscounted cash flow basic formula can be seen in equation 6 5.
The chapter explains discounted cash flow dcf models that value equity directly. Section 6 lays out the determinants of dividend growth rates, and the final section summarizes the reading. The second edition of damodaran on valuation stands out as the most reliable book for answering many of today. Assuming positive cash flows and interest rates, the present value will fall and the future value will rise. Discounted cash flow valuation, part ii faculty of business administration lakehead university spring 2003 may, 2003 outline of the lecture 6. Fv describe the nominal future period value of a cash flow balance. Discounted cash flow valuation 1 multiple cash flows fv example 1 2 multiple cash flows fv example 2 3 multiple cash flows fv example 3 a. In order to be a successful ceo, corporate strategist, or analyst, understanding the valuation process is a necessity.
If you have watched this lecture and know what it is about. Takes longterm perspective appropriate for investment decisionmaking in illiquid markets multiperiod, typically 10 yrs in r. Assuming positive cash flows and interest rates, the future value increases and the present value decreases. Basic approaches to valuation include discount ed cash flow analysis and relative analysis. No rights can be derived from the useapplication of the method as described in this article. Basic stock valuation model expanded since stocks do not have a maturity period, can consider the value of stock to be equal to the present value of future expected dividends.
The four pieces are the present value pv, the periodic cash flow c, the discount rate r, and the number of payments, or the life of the annuity, t. Eq 65 eq 66 or eq 67 where cf cash flow k discount rate n time periods, time 1 to t t time tv terminal value. If the cash flows being discounted are cash flows to equity, the appropriate discount rate is a cost of equity. Assuming positive cash flows, the present value will fall and the future value will rise. The four pieces are the p resent value pv, the periodic cash flow c, the discount rate r, and the number of payments, or the life of the annuity, t. Interest earned only on the original principal amount invested. In this section, we begin to study ways to value multiple cash. The objective of the business valuation certification training center is to make the entire process more objective in nature. The use of the discounted cash flow dcf method as a. Business valuation income approach 103 a discounted cash flow is a multiyear, or period, calculation of value. Detail description of discounted cash flow formula as. Calculating free cash flow for 20082010 as gaap confuses operating and financing cash flows, the cash flow statement numbers must be adjusted. The purpose of this course is to provide an overview of the discounted cashflow dcf method of valuation.
Discounted cash flow analysis is based on the cash flows a firm is expected to produce for its investors along with the timing and risk of these cash flows. Discounted cash flow valuation faculty of business administration lakehead university spring 2003 may 12, 2003 outline of chapter 6 6. The discounted value of a sum is its present value. The first involves discounting projected free cash flow to firm fcff at the weighted average cost of the capital to find a companys. Chapter 4 discounted cash flow valuation solutions to questions and problems note. Valuing common stocks using general discounted cash flow model is made difficult as. The amount an investment is worth after one or more periods. Finance chapter 6 discounted cash flow dcf valuation. Fin 311 chapter 5 handout page 1 chapter 5 discounted cash flow valuation compounding periods other than annual lets examine monthly compounding problems. Chapter 6 discounted cash flow valuation learning objectives lo1 lo2 lo3 lo4 how to determine the future and present value of investments. In free cash flow valuation, intrinsic value of a company equals the present value of its free cash flow, the net cash flow left over for distribution to stockholders and debtholders in each period there are two approaches to valuation using free cash flow. Assuming positive cash flows, the present value will fall and the future value will. The time value of money outline why time value future value of a single amount future value of an annuity. Chapter 6 discounted cash flow valuation ppt video online.
To find the length of time for money to double, triple, etc. Assuming positive cash flows, both the present and the future values will rise. In fact, there are specific companies where the dividend discount model remains a useful took for estimating value. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Aswath damodaran 2 summarizing the inputs in summary, at this stage in the process, we should have an estimate of the the current cash. Allendof chapter problems were solved using a spreadsheet. For multiple cash flows, just add up the individual present. Start studying finance chapter 6 discounted cash flow dcf valuation. Discounted cash flow dcf definition analysis examples. Discounted cash flow valuation ch 6 free download as pdf file. The dcf method requires that an estimated cashflow and a riskadjusted discount rate be determined. Discounted cash flow valuation busi 71107116 yost future value definitions future value fv. Recognizes asset valuation fundamentally depends upon future net cash flow generation potential of the asset.
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