ACTG 3000 Chapter Notes - Chapter 7: Dividend Discount Model, Discounted Cash Flow, Stock Valuation
5 Oct 2016
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Chapter 7: prospective analysis valuation theory & concepts. Valuation is the second and final stage of prospective analysis. It is process of converting a forecast into an estimate of the value of the firm"s assets or equity. Among available methods of valuation we will focus on are: Discounted dividends: expresses value of firms equity as pv of forecasted future dividends. Discounted cash flow (dcf) analysis: involves production of detailed, multiple year forecasts of cash flows, forecasts discounted at firms estimated cost of capital to arrive at estimated present value. Finance theory holds value of any financial claim is simply present value of the cash payoffs that its claimholders receive. Since shareholders receive cash payoffs from company in form of dividends, value of their equity is pv of future dividends: Where = the cost of equity capital aka the relevant discount rate. Valuation formula views firm as having indefinite life.
