An empirical study of the discounted cash flow model Martin Edsinger1, Christian Stenberg2 June 2008 Master’s thesis in Accounting and Financial Management Stockholm School of Economics Abstract The purpose of this thesis is to compare the practical use of the DCF model with the theoretical recommendations. The empirical study is based on eight different DCF models performed by American, European and Nordic investment banks on the Swedish retail company Hennes & Mauritz (H&M). These models are currently being used internally by the corresponding equity research departments to determine the fair value of the H&M stock. The aspects that are studied are regarded as the basic theoretical requirements of the DCF model. The discrepancies …show more content…
Empirical findings .................................................................................................................................. 14 4.1 Historical information ..................................................................................................................... 14 4.2 Forecasting procedure ..................................................................................................................... 15 4.3 Discount rate .................................................................................................................................... 17 4.4 Steady state assumption .................................................................................................................. 18 4.5 Other valuation aspects................................................................................................................... 20 4.6 Implied target prices and stock performance .............................................................................. 21 5. Discussion of empirical results............................................................................................................. 22 5.1 Historical information ..................................................................................................................... 22 5.2 Forecasting procedure ..................................................................................................................... 23 5.3 Discount rate
1. Given the proposed financing plan, describe your approach (qualitatively) to value AirThread. Should Ms. Zhang use WACC, APV or some combination thereof? Explain. (2 points)
Valuation is the estimation of an asset’s value, whether real or financial, based on variables perceived to be related to future investment returns, on comparison with similar assets, or, when relevant, on estimates of immediate liquidation proceeds (Pinto, Henry, Robinson, Stowe; 2010). Correct valuation of real assets can present challenges to financial analysts. Different models can be used to arrive at the closest estimate of value and yet certain issues will always arise. This case attempts to tackle two approaches in real asset valuation: Discounted Cash Flow (DCF) analysis and the issues surrounding such, as well as the Black-Scholes Model for Real Options. Questions to be addressed in the study are:
1. The first step to evaluating the cash flows is to conduct the depreciation tax flow analysis. Depreciation is not a cash flow, but the depreciation expense lows the taxes payable for the company. As a result, the tax effect of deprecation needs to be calculated as a cash flow. There are two depreciable items on the company's balance sheet the building and the equipment. The equipment is known to have a seven year depreciable life, which will be assumed to be straight line. The building is also assumed to be subject to straight line depreciation, this time of forty years. The tax saving reflects the depreciation expense multiplied by the tax rate, which in this case is assumed to be 28%. The following table illustrates the tax effect in future dollars of the depreciation expense:
In this example we have a case in which years 89, 90 and 91 net income is less than net cash provided by operating activities. One of the major reasons for this appears to have been depreciating high cost of equipment. The depreciation is trending downward over the three-year period indicating less long-term assets are being purchased/capitalized to run operations. While depreciation does not involve cash, it does impact net income. In addition, account payables have been decreasing over the last two years and significant cash has been used in the last year to pay the liability. In 1990 there are significant costs associated with restructuring activities. There
A firm has an expected dividend next year of $1.20 per share, a zero growth rate
GEOG 104 – Weather Climate Society: You have gotten 283.5/425 66.7% of the available points thus far. I know that this is your most difficult class; however, I have seen you working with your assigned tutor for this class. Please, come every day to prepare for this class. Your Exam # 2 is going to be given this Thursday, November 12th, contact your tutor and prepare very well for this
in our calculations, as this company exhibited dramatic value differences to others in the sample, (likely to skew our results and prove misleading). Using the average of the revised sample field for each ratio, we inserted Torrington’s values where appropriate to generate an entity value. The findings generated two values for Torrington, 606 million and 398 million. Taking the average of these two numbers, Torrington exhibited a relative value of 502.41 million. Because of the lack of related information given in the case, and the often large differences in measures amongst competitors, different capital structures, internal management strategies, there remained many unknowns in our model. We decided it would be best to use this valuation to reaffirm our assumptions in our DCF valuation. (Please see exhibits)
This case attempts to tackle two approaches in real asset valuation: Discounted Cash Flow (DCF) analysis and the issues surrounding such, as well as the Black-Scholes
As discounted cash flow method assumes all equity financed acquisition, it presents more comparable value for the real option values shown. The value of Apache’s possibility to decide whether to exploit the reserves equals the difference between DCF value and the real option value.
In DCF valuation (Chart 2), long-term growth rate is assumed to be 4%. Change in working capital is calculated as the average of 1997 and 1996 figure and is assumed to be constant for simplicity. Terminal value is valued at $69,398.1 million and NPV is $51,525 million. Stock price will be $37.07, indicating an exchange ratio at 0.46. This is a very conservative valuation as our DCF price is lower than Amoco’s current market price.
class he had missed had been devoted to a lecture and discussion of the statement of cash flows, and
Before we make the decision, we need to know the value of the Media General and the value of this offer. So we forecast the value of company by DCF model.
A discounted cash flow analysis measures the value of a company todays based on calculated predications of how much money they will make in the future. This valuation method is used to determine how profitable an investment is. To conduct a DCF analysis, I used future free cash flows predictions ranging from years 2016 through 2026 to get an estimated present value. My ultimate goal in conducting a discounted cash flow analysis for this project is to value to the equity of the stock and find the stock price for the Danaher Corporation.
We performed a DCF Analysis for two scenarios: 1) assuming the purchase of the residual equity of LIN Broadcasting; and 2) assuming the sale of the residual equity of LIN Broadcasting (See Exhibits 1 & 2). The most critical assumptions impacting value were: 1) discount rate and 2) terminal growth rate. We relied on discount rates between
The project proposal will be critical analysed before it will established in South Korea. In the first assignment will looked in depth in political, country risk, FDI theories and motive for the project. In the second assignment, the cost of capital for the project was calculated, stating the risk for both the parent and subsidiaries.