➢ Note: Market to book ratio (or “Tobin’s Q” ratio) >1 if
market expects firm to take on positive NPV projects (i.e. firm has significant “growth opportunities”)
acquisition premia of “similar” transactions)
MBA1 Finance
Discounted Cash Flow Valuation
➢ What cash flow to discount?
➢ Investors in stock receive dividends, or periodic cash distributions from the firm, and capital gains on re-sale of stock in future
= uninvested capital + present value of cash flows from all future projects for the firm
➢ Note: This recognizes that not all capital may be
currently used to invest in projects
➢ Discounted cash flow (DCF) approaches
➢ Dividend discount model ➢ Free cash flows to equity model (direct approach) ➢ Free cash flows to the firm model (indirect approach)
MBA1 Finance
The Valuation Process
➢ Identify cash flows available to all stakeholders
➢ Compute present value of cash flows
并购整合估价(1)
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MBA1 Finance
Valuation as a Tool
➢ We encounter valuation in many situations:
➢ Mergers & Acquisitions ➢ Leveraged Buy-outs (LBOs & MBOs) ➢ Sell-offs, spin-offs, divestitures ➢ Investors buying a minority interest in company ➢ Initial public offerings
MBA1 Finance
Valuation: First Principles
➢ Total value of the firm
= debt capital provided + equity capital provided + NPV of all future projects project for the firm
➢ How do we establish value of assets? ➢ Objective today: To preview valuation methods used
most commonly in practice
MBA1 Finance
Business Valuation Techniques
➢ Relative valuation approaches
➢ P/E (capitalization of earnings) ➢ Enterprise Value/EBITDA ➢ Other: P/CF, P/B, P/S ➢ Control transaction based models (e.g. value based on
➢ If investor buys and holds stock forever, all they receive are dividends
➢ In dividend discount model (DDM), analysts forecast future dividends for a company and discount at the required equity return
➢ Problem with dividends: they are “managed”
MBA1 Finance
Dividends: The Stability Factor
Factors that influence dividends:
➢ Desire for stability ➢ Future investment
➢ How do managers add to equity value?
➢ By taking on projects with positive net present value (NPV)
➢ Equity value =
equity capital provided + NPV of future projects
Source: A. Damodaran, Investment Valuation, Wiley, 1997
MBA1 Finance
Valuation: Back to First Principles
➢ Value of the firm =
value of fixed claims (debt) + value of equity
needs
➢ Tax factors ➢ Signaling
prerogatives
Dividend changes: Publicly traded U.S. Firms
90% 80% 70% 60% 50% 40% 30% 20% 1990
1993
No Change Increase Decrease