Lecture 3: Equity Valuation

Question 1

List out all markets in the financial markets

Answer 1

Money Market
Capital Market(Debt and Equity market)
Derivates Market
Foreign Exchange Market

Question 2

Characteristics of the stock market (equity)

Answer 2

Stocks or shares represent ownership in a firm.

Stockholders/Shareholders can earn a return in two ways:
* Price of the stock rises over time.
* Receive dividends paid by the firm.

As part owner of a firm, shareholders have a claim on all of
the company’s assets.

Question 3

Characteristics of the stock market (equity) 2

Answer 3

Stockholders also have the right to vote for directors and on
certain issues.
* There are two types of stock:
* Common stock
Right to vote.
Receive dividends.
* Preferred stock
Receive a fixed dividend.
Do not usually vote.

Question 4

what does zero growth implies ? - Zero Growth Model

Answer 4

the dividend D is a fixed
amount that does not change over time.

Question 5

what does constant growth imply ? - constant growth model

Answer 5

Constant growth implies that the dividend D grows at
rate g over time

Question 6

Non-Constant Growth Model allows what ?

Answer 6

Allows for ‘supernormal’ growth rates over a specified
period of time

Question 7

What is Free Cash Flow to the Firm (FCFF)?

Answer 7

essentially, it’s the surplus cash a company has left over
after covering all operating expenses and necessary investments,
providing insight into its financial flexibility and ability to pay dividends
or reduce debt.

Question 8

FIRST STEP - calculation for FCFF using the cash flow statement or income
statement

Answer 8

FCFF = Cash flow from operations + Cash flow from investing
activities