Tutorial 1 Flashcards
1
Q
A
2
Q
Miller’s earned $5 million in after-tax net operating income in 2019. The firm also had net operating assets of $ 20 million and net financial obligation of $14 million during the year. The firm’s net operating income and net operating assets will grow at 20 percent between 2020 and 2024, after which the firm’s free cash flows will grow at 5 percent in perpetuity. The cost of capital is 10 percent. Estimate the value of equity in the firm.
A
3
Q
Explain why terminal values in earnings-based valuation (e.g., RE) are significantly less than those in Discounted Cash Flow (DCF) valuation.
A
- DCF terminal values include the PV of all expected CFs beyond the forecast horizon (normal and abnormal)
- The terminal value in the abnormal earnings technique includes only the abnormal earnings.
- Residual Earnings Model recognizes that current book value and earnings over the forecast horizon already reflect many of the cash flows expected to arrive after the forecast horizon.
