Valuation And Perpetuity Cash Flow Flashcards
What is a perpetuity cash flow?
A special type of recurring cash flow which is expected to continue into the infinite future
What is a recurring cash flow?
The same cash flow repeated over and ovver
What is the value of any asset equal to (in terms of finance)?
The sum of discounted cash flow expected from the asset
What is the company’s value the sum of?
Incremental cash flows from each of the company’s investment projects
What are companies and shares valued as?
Perpetuities
What is the formula to find the value?
Sum of DCF = RCF/(1+r) + RCF/(1+r)^2 + RCF/(1+r)^3 + …
In a growing perpetuity, is the cash flow the same every year?
OBVIOUSLY NOT IDIOT
In a growing perpetuity, is the growth rate the same every year?
Obviously. U fat idiot JP LEARN HOW TO TEACHHHADHAODIDGGG
If g= constant % growth, how would you calculate the value?
Value V0 = sum DCF = CF1/(r-g)
Where CF1 is expected cash flow next year and V0 is the total value of the firm
Is incremental cash flow easy to extract from company accounts?
NO IT IS HARD BECAYSE STANDRD ACCOUNTS ARENT DESIGNED T O PROVIDE THAT INFO
On the stock market, how is valuation usually done?
On a per share basis
What are share valuations usually based on?
Bottom line company earnings/income/net profit as presented on the profit and loss account.
How would you calculate the price per share?
e1 (projected earrings one year ahead)/(r-g)
Or the p/e ratio
P0/e1 = 1/(r-g)
What are the two ways of interpreting p/e?
- Can be seen as the amount of pounds per share that the market is prepared to offer for each pound of earnings per share
- Can be seen as the market’s implicit estimate of;
R - the discount rate which varies directly with the perceived riskiness of the firm
G - The expected % growth rate
