Week 8.1- Valuation and Perpetuity Cash Flow

Question 1

What is a perpetuity cash flow?

Answer 1

A special type of recurring cash flow

Question 2

What is a recurring cash flow?

Answer 2

The same cash flow repeated over and over

Question 3

What is the value of an asset equal to?

Answer 3

The sum of discounted cash flow expected from the asset

Question 4

Describe incremental cash flow

Answer 4

The cash flow a new project, product, investment, or campaign generates or subtracts from a company

Question 5

How do you calculate value?

Answer 5

= Sum of DCF = RCF / Interest multiple + RCF / Interest multiple 2 + RCF / Interest multiple 3 + …

Question 6

For perpetuity, the value = ?

Answer 6

= Sum of DCF = RCF / Discount rate = 100/ Discount rate

Question 7

How do you calculate the total value of the firm (enterprise value)?

Answer 7

= Sum DCF = Expected cash flow next year / ( Discount rate - Constant % growth )

Question 8

What are share valuations usually based on?

Answer 8

Bottom line company earnings / income / net profit as presented on the profit and loss account

Question 9

How do you calculate price per share now?

Answer 9

= Earnings one year ahead / ( Discount rate - Constant % growth )

Question 10

What are 2 ways in which P/E ratios can be determined?

Answer 10

• Can be seen as the amount of £s per share that the market is prepared to offer for each £1 of earnings per share
• Can be seen as the market’s implicit estimate of the discount rate which varies directly with the perceived riskiness of the firm, and the expected % growth rate