Lecture 2: Valuation

Question 1

What valuation models are used in practice?

Answer 1

Direct valuation:
1) Dividend discount model
2) Operating cash flow model
3) Free cash flow model

Relative valuation:
1) Peer group multiples

Question 2

What are some myths about valuation?

Answer 2

1) Since valuation models are quantitative, valuation is objective
2) A well-researched and well-done valuation is timeless
3) A good valuation provides a precise estimate of value
4) The more quantitative a model, the better the valuation
5) Value is what matters, the process of valuation does not

Question 3

What is a method to find the growth rate for the gordon growth model

Answer 3

g = (Plowback ratio) * (Return on Equity) = (1 - payout) * (ROE)

Question 4

How do you calculate the CapM

Answer 4

CapM = rf + ß * (market risk premium)

Question 5

How to find the ß for CapM

Answer 5

ß(l) = ß(u)[1 - (1 - tax rate)(Debt / Equity)] - ß(d)*[Debt / Equity]