STOCK VALUATION

Question 1

What is the price of a stock dependent on in the dividend-discount model?

Answer 1

dividends, selling price, cost of equity (NOT TIME)

Question 2

What are the three different methods of stock valuation?

Answer 2

Dividend-discount method
Discounted Free Cashflow Model
Based on comparable companies (peer to peer comparison)

Question 3

What are the two main sources of uncertainty?

Answer 3

Future selling price
Discount factor

Question 4

If a firm wants to increase its share price, should it cut its dividend and invest more, or should it cut investment and increase its dividend?

Answer 4

Depends on the profitability of the investment: cutting dividends will only increase share price when NPV is positive

Question 5

With growing dividends, what does the value of the share depend on?

Answer 5

Current dividend level, the cost of equity, and the growth factor

Question 6

Why do we need to adjust the growth model?

Answer 6

In order to use the growth model, we need a constant growth. However, it is common for newer companies to have higher growth rates before they mature since they retain 100% of their earnings to reinvest them

Question 7

What are the limitations of the dividend discount model?

Answer 7

small changes in the assumed dividend can lead to great changes in estimated stock price
some companies do not pay dividends
cost of equity must exceed g

Question 8

How do you find FCF

Answer 8

EBIT*(1-t) + DA - CApex - Change in WCN

Question 9

What is FCF used for?

Answer 9

To pay back debtholders and shareholders

Question 10

What is Enterprise Value?

Answer 10

The sum of all discounted FCFs + discounted terminal value

Question 11

What is TV?

Answer 11

Terminal value is 𝐹𝐶𝐹𝑁+1/𝑟−𝑔𝐹𝐶𝐹

Question 12

How do you find Equity Value?

Answer 12

Enterprise val - debt + cash
OR EV - D + C - Preferred shares - Minority Interest

Question 13

What do you use to find the value of a stock in DCF model?

Answer 13

Equity Value and the number of shares

Question 14

When does most of the firm’s value come from in the DCF model?

Answer 14

After the business plan horizon, however proportionately the years before the horizon are worth more

Question 15

What does the Enterprise Value represent?

Answer 15

Net cost of acquiring equity, taking its cash, paying off all debts, owning the unlevered business (you only buy common shares)