20 Valuing a Company

Question 1

How do you value a company

Answer 1

• Need cashflows and discount rate
• Two sections
  o Be able to FC cashflows for near future
  0 Then apply a growth rate to infinity
• Gordon Growth Model
• But need to discount output of GGM from end of known time horizon to present day
• If is one period before time horizon
• Creates a valuation of all future cashflows to infinity at a point in the future
• V_10=(FC F_11)/(k_e-g)
• Must need a discount rate for all this
  o If doing WACC need cost of equity and debt
• Cost of debt can be derived from bonds
• Cost of equity can be found with CAPM
• R_f+(E_m-R_f ) β_i
• Might be given an asset beta for the market so will need to gear up for equity beta
• Or might not have been given beta if buying an unlisted company
• But can derive a similar companies beta
• Work out proxy based on relative gearing
• Un gear beta and average to find industry beta and then gear back up
• Then put into WACC
• Exam will not take you step by step you will have to work it all out from the blurb of the question