ACTG 3000 Chapter Notes - Chapter 7: Abnormal Return, Savings Account, Free Cash Flow
Document Summary
Chapter 7: prospective analysis: valuation theory and concepts. Defining value for shareholders financial theory holds that the value of any financial claim is simple the pv of cash payoffs that its claimholders receive. Since payoffs are in the form of dividends, the value of equity is the pv of future dividends. Thus, equity value = pv of expected future dividends. This valuation formula is called the dividend discount model. It forms the basis for most of the common theoretical approaches for equity valuation. If the firm had a constant dividend growth rate (gdiv), indefinitely, its value would simplify to the following formula: Forecast free cash flows available to equity holders over a finite forecast horizon (approx. Forecast free cash flows beyond the terminal year based on some simplifying assumptions. Discount free cash flows to equity holders at the cost of equity. The discounted amount represents the estimated value of free cash flows available to equity.
