FIN Ch. 13 - Firm Valuation

What are 2 equations that define something as a growth stock?

mkt/book > 1 In other words, it's worth more than when it was bought Beta > 1 In other words, higher risk

What types of firms would use the replacement cost model?

Privately held, smaller companies and real estate

How do you find the market value/share?

Mkt value/share = price of share = (intrinsic value - total interest bearing debt) / # shares

What are 2 equations that define something as value stock?

Mkt/book < 1 In other words, it's worth less than it was originally bought for Beta < 1 In other words, lower risk

What is the earning's yield?

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What are the 5 steps to the discounted cash flows method?

1. Forecast 3-5 years into the future and construct pro-forma statements 2. Compute FCF for each of these forecasted years 3. In the final year, estimate a terminal value and add it to the final year's free cash flow from step 2 4. Compute the appropriate discount rate 5. Use TVM to discount cash flows to present value

Why would you need to value a firm?

1. Merger and Acquisition (it's getting bought out) 2. IPO -- it's becoming publicly traded 3. Investments - if you want to buy stock 4. Loans -- you can get a loan to value (loan amount dependent on value of firm)

What are the three firm valuation methods?

1. Replacement-cost 2. Discounted Cash Flows 3. Comparable Multiples

What are the 3 valuation caveats

1. Taking out salary 2. Liquidity discount (worth less if not publicly traded) 3. Control premium (costs more if you want to take control of the entire firm)

What are 5 equations you can use with comparable multiples?

P/S -- good when there's no earnings E/P -- earning's yield (as E --> 0, the ratio --> 0) P/EBITA -- Proxy for CF Market/Book -- Market equity/book equity P/E -- price/earnings

What is the basic equation for the value of a firm?

V(firm) = V(equity) + mkt value of debt

Describe the Discounted Cash Flows method

Use the Asset Valuation model V(a) = (summation) CF(t) / (1 + k)^t with FCFF or FCFE as the numerator and the WACC (FCFF) or Ke (cost of Equity, FCFE) as the denominator

Describe the Replacement Cost method

You determine what it would cost to start the company from scratch today. Pro: intuitive Con: hard to estimate intangible assets

Describe the Comparable Multiples Method

You find firms similar to the firm you are trying to value and you choose a multiple (ex: PE ratio or Earnings Yield) and you multiply the earnings of firm(a) to the PE ratio of firm(b).