代写Advanced Corporate Finance

AFIN353

DCF and Multiples

Valuation

AFIN353

LEARNING OUTCOMES..TOPIC 1, WEEK 1

1.To refresh our understanding of the __time value of ____money__.

2.To understand the __alternative approaches to ____valuation__.

3.Use the __dividend-discount model__ to compute the value of a dividend-paying company’s stock and to calculate the total return of a stock, given the dividend payment.

4.Discuss the determinants of future dividends and growth rate in dividends, and the __sensitivity of the stock price__ to estimates of those two factors.

5.Assuming a firm has a long-term constant growth rate after time N + 1, use the constant growth model to calculate the __terminal value__ of the stock at time N.

6.To apply the __Multiples approach__ to valuation

7.Understand the __limitations of each valuation model__.

ADVANCED CORPORATE FINANCEOverview

DCF and MULTIPLES VALUATION

A.Introduction: Valuation

B.Toolbag – Present Values

C.Toolbag – Rates and Returns

D.Income, Capital and Total Returns

E.Valuing Shares and Firms

§Dividend Discount Model

§Relative Valuation/Valuation Multiples

§Free Cash Flow to Firm [Next Week]

WEEK 1A. Intro: Valuation

§Valuation is important to investment decision-making.

§

§There are 3 ways to think about valuation. They are:

§Advanced Corporate Finance AFIN353 代写

1.Discounted Cash Flow (DCF) valuation,

2.Multiples/Relative or Comparables valuation,

3.Contingent claims: Option valuation.

●

§Arguably DCF is the most important.

§DCF has 3 main parts: the formulas, the cash flows and

the required returns.Intro: DCF Valuation Overview

•DCF is also called 'net present value' or 'discounted

expected value'.
•Preferred when future cash flows are predictable and the

required return (discount rate) can be easily calculated.
•Widely used for valuing securities (eg. Bonds, shares),

assets (eg. real estate with stable rental income), companies,and for evaluating investment projects.

•More of an absolute or intrinsic valuation technique,

as opposed to a relative valuation technique.Intro: Multiples Valuation

•Multiples Valuation is a relative valuation technique.

Prices assets using the prices of other, similar assets.
•Many different types of multiples can be used.

e.g Price/Earnings, Price/Sales, Price/m2
•Simple, intuitive, based on real-world prices.

•

•Preferred when future cash flows are unpredictable,

and when there are many similar assets that are frequentlytraded at observable prices, such as stocks.

•Real estate and stocks are suitable for multiples valuation.

.MULTIPLES VALUATION/RELATIVE VALUATION

B. Toolbag: Present Value

Formulas (Ch 4)

Toolbag: Present Value

Formulas (Ch 4)

Annuity: a series of identical cash flows occurring at

regular intervals through time for a specified number of

periods.

Toolbag: Present Value

Formulas (Ch 4)

To determine FV (future value), remember the future value

of a single cash flow is:

Advanced Corporate Finance AFIN353 代写

HINT: If you need the future value of an annuity or perpetuity,

Find the PV and multiply the PV formula by (1+r)t.

Question 1: Ordinary Perpetuity: You want to create a fund

that will pay a scholarship of $30,000 each year in perpetuity

(forever) starting in one year’s time. The fund will earn 8%pa.

How much will you need to donate today (t=0)?

Answer:

Calculation Examples: Perpetuity

Question 2: Perpetuity Due: What is the answer to Q1

if the first payment was to be made at t=0?

Answer:

Question 3: What is the answer to Q1 if the first payment

was made exactly 3 years from today (t=3)?

Answer: Tricky! The PV perpetuity formula assumes the

first cash flow is one period into future. So, calculate the

value at one period prior the first cash flow, then discount

that back to t=0.

Value of perpetuity Discount Value t=2

at t=2 to t=0

Try this yourself!

C. Toolbag: Rates & Returns

(Ch 5)

Lessons:

(1)When we use a particular discount rate in DCF,

we must match the discount rate period with the periodicityof cash flows e.g. If cash flows are at 6 month intervals,

we must use the effective 6 month discount rate.

(2) Effective rates can be used to discount cash flows.

APR's cannot be used to discount cash flows,

they must be converted to effective rates first.

Toolbag: Rates & Returns

(Ch 5)

Toolbag: Rates & Returns

(Ch 5)

Toolbag: Rates & Returns

(Ch 5)

Example:

A credit card might advertise an interest rate of 12% pa.

This is an APR. Because credit cards are always paid off

monthly, the compounding frequency is per month. Therefore

the interest rate is 12% pa compounding monthly and the

effective rate that you pay is greater than the

quoted APR.

EAR= (1+0.12/12)12-1=12.6825%

Toolbag: Rates & Returns

(Ch 5)

Toolbag: Rates & Returns

(Ch 5)

Toolbag: Rates & Returns

(Ch 5)

Toolbag: Rates & Returns

(Ch 5)

•Note that the rates used in the above equation should be effective rates,

not APR's.
•Be aware that Annualised Percentage Rates (APR's) are also sometimes

called 'nominal rates' even though they have nothing to do with the conceptof inflation.

This is very confusing. In these notes, when a 'nominal rate' is mentioned,

it means a rate that is not adjusted for inflation.

Question 5:

Westpac advertises a 6 month term deposit with an interest rate of

5%pa (APR).

a) What is the effective interest rate per compounding period?

Answer:

APR/k periods = .05/2 =2.5%

The term deposit pays 2.5% on the amount of the deposit. This is the

effective 6mth rate.

b) What is the effective annual rate?

Answer:

This converts the 6mth rate to an annual rate, in essence assuming

funds are reinvested at same rate until year end.