Finance technical Questions & Answers

Finance technical Questions & Answers Enterprise value market value of equity+debt+preferred stock+minority interest-cash what is valuation 1. Calculating the worth of a security, company, etc. 2. asset managers essentially determine which assets are undervalued some ways to value a company 1. Enterprise Value/EBITA 2. P/E 3. P/B 4. EV/Sales how do you value a company There are a number of ways I can think of to value a company, and I'm sure you know even more. The simplest is probably market valuation, which is just the public Equity Value of a company based on the public markets. To get the Enterprise Value, you add the net debt on its books, preferred stock, and any minority interest. A few other ways to value a company include comparable company analysis, precedent transactions, discounted cash flow. precedent transaction analysis Compare the size and earning of a company of similar size in a historic setting spreading comps collecting and calculating relevant multiples for comparable companies how to calculate free cash flow sales revenue - operation costs - taxes - net investment - change in working capital (Depreciation and amortization are non-cash and therefore not included) EBIT Operating Earnings. Revenue - COGS - Operating Expenses free cash flow operating cash flow - capital expenditures. Allows a company to go over opportunities that enhance customer value. 2. Free cash flow equals EBIT less taxes plus D&A less capital expenditures less the change in working capital. cost of capital Cost of capital depends on the mode of financing used - it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt. Dividend discount model Value of stock=dividend per share/(discount rate - dividend growth rate) capital expenditure funds used by a company to acquire or upgrade physical assets net investment amount spent by company on capital assets or gross investment, less depreciation working capital current asset - current liability DCF model steps 1.) Project FCF for a certain period of time: EBIT(1-tax rate)+D &A - change in networking captial - cap ex 2.) Project cash flows beyond that period. Need a terminal value. Use a growth model or multiple. Gordon Growth Model: Terminal Value = Final Projected Year Cash Flow*(1+Long-Term Cash Flow Growth Rate) 3.) Now, discount that back to the present using the WACC. 4.) Sum of the terminal value calculation and the FCF. capital asset pricing model Cost of equity(Re)=Rf+Beta(Rm-Rf) rf: risk free rate. amount obtained from investing in security free from credit risk. eg. bonds beta:how much a company's share price move against the market as a whole. 1 volatile. 1 relatively more stable. rm-rf: equity market risk premium. returns investors expect. Over and above the risk free rate, to compensate them for taking extra risk by investing in the stock market.