Prospective analysis Flashcards
Valuations
process of converting a forecast into an estimate of the value of a firm-all business decisions involve valuation
Valuation methods
> discounted dividend
discounted abnormal earnings
price multiples
discounted cash flow analysis
Discounted dividend
- firm has constant dividends and growth rate
Dividend Yield
- Investors are often interested in the dividend yield for particular shares
Discounted Abnormal Earnings
- Divided and earnings are linked
- abnormal earnings will grow at a constant rate ‘g’
Valuation using price multiples
- widely used by analyst and business brokers
- price earnings ratio most commonly used
Value to book ratio
- if abnormal earnings formula is scaled by book value
Discounted cash flow
derived from dividend discount model
comparing valuation method
-Several difference between the various model
Prospective analysis
- need to make forecasts of financial performance over the life of the firm in terms of dividends, earnings or free cash flow
Detailed forecasts
- number of periods over which the detailed forecasts are to be made is a choice the analyst must make
terminal value
forecasts the performance over the remainder of a firm’s life
Computing a discount rate
To value a company’s assets we need to discount the cash flows available to both equity and debt providers
