CONTENT 1. Derive the FCF-based valuation model 2 1）Present value of FCF-based valuation (FCFF) 2 2）Present value of FCFE 2 2. Compare and contrast the FCF-based valuation with the dividend discount model 6 1) Similar between FCF-based valuation (FCFE) and DDM 6 2) Difference between FCF-based valuation and DDM 7 3. Identify & suggest remedies to some of the biggest limitations of a FCF-based valuation model 9 Bibliography 11 1. Derive the FCF-based valuation model Free cash flow indicates a cash flow which generate by the core activities of company after the deduction of investment capital.
Solvency ratios this is one of many ratios used to measure a company’s ability to meet long-term obligations. The solvency ratio measures the size of a company’s after-tax income, excluding non-cash depreciation expenses, as compared to the company’s total debt obligations. It provides a measurement of how likely a company will be to continue meeting its debt obligations. Users who may be interested in each type of ratio? Liquidity ratios are used by suppliers and other trade creditors.
Trade-off is the form of either buying less or a lesser quality item in order to purchase more or a greater quality item. The various considerations made while calculating time value of money (TVM) include considerations about the amount of investment, the time period required to attain the returns, the total returns and the expected future value of those returns along with the net value of the profit or gain earned out of that investment. The time value of money (TVM) can be used to create a retirement plan as it is possible to use this method to find out the future value of the earnings and then be able to invest accordingly. An approximate estimation about the total amount that a person needs in his retirement would help him save and invest accordingly in the current period as then he can go ahead and find out various retirement plans and the percentage of returns that they are offering as well as the appropriateness of payments and other factors. He can then calculate the future value of the investments and find out if it
Chapter 5 Assignment 1. Contrast a) Break-even Analysis (BEA): It finds the amount of time required for the cumulative cash flow from a project to equal its initial and ongoing investment. Present Value (NP): It represents the current value of a future cash flow. Net Present Value (NPV): It uses a discount rate which is determined from the company’s cost of capital to establish the present value of a project. Return on Investment (ROI): It is the ratio of the net cash receipts of the project divided by the cash outlays of the project.
The surplus (or deficit) will increase (or decrease) the return on the owners’ equity. The rate of return on the owners’ equity is levered above or below the rate of return on total assets. Operating leverage affects a firm’s operating profit (EBIT), while financial leverage affects profit after tax or the earnings per share. The variability of EBIT and EPS distinguish between two types of risk—operating risk and financial risk. Operating risk can be defined as the
Profit ratios are used to determine the overall efficiency of the firm in generating returns for its shareholders. Assets utilization ratios help managers to determine how the company is using its assets to generate sales and profits. Liquidity ratios measure the ability of the company to meet its debt obligation on a timely basis. The ratios used to determine liquidity are the current ratio and quick ratio. Capitalization ratios evaluate the financial leverage of a company.
We estimated the terminal value of the company using the Gordon Growth Model, which comes the result of $4,812,500. As shown in table1, the annual projected free cash flows are -112000, 6000, 151000, 314000, 5307500(495000+4812500). The net present value of the project when the firm is entirely equity financed should equal to the unlevered net present value of the project. With the discount rate of 15.8%, the NPV of the project is $1,228,485. The total value of the project is the total free cash flows on the project which is $2,728,485.
There are two approaches for presenting the operating activities direst method and indirect method. Direct method reports the components of cash flow from operating activities as gross receipts and gross payments. The indirect method starts with the net income from the income statement and then eliminates noncash items to arrive at net cash inflow and outflow from operating activities. Investing activities include (a) purchasing and disposing of investments and productive long-lived assets using cash, (b) lending money, and collecting the loans. Cash flow from investing activities is cash inflows and outflows related to the purchase and disposal of long-lived productive assets and investments in the securities of other companies.
The Weighted Average Cost of Capital is the average of the costs of a company's sources of financing-debt and equity, each of which is weighted by its respective use in the given situation. By taking a weighted average, it shows how much interest the company has to pay for every marginal dollar it finances. A firm's WACC is the overall required return on the firm as a whole and, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. Also, WACC is the appropriate discount rate to use in stock valuation. No, I don’t agree with Cohen’s WACC calculation.
What is the difference between a firm’s cash cycle and its operating cycle? A company’s cash cycle is the average length of time from when a firm pays cash for its inventory to when it receives cash from the sale of that inventory. On the other side an operating cycle is the average length of time between when a firm purchases inventory and when it gets the cash for the product. b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal?