Chapter 10 · 12 of 100 marks · workbook pages 198-217
Valuation Principles
Price versus value, sources of value, DCF (dividend and free cash flow models, CAPM, WACC), the earnings and asset multiples, transaction multiples, SOTP, new-age metrics and the limits of valuation.
Focus
- Price vs value
- DCF
- DDM
- FCFE and FCFF
- Terminal value
- CAPM
- WACC
- Relative valuation
- SOTP
Must know
- DCF values expected cash flows by discounting them at a rate that reflects risk.
- DDM suits mature companies with stable dividends; FCFE suits equity cash flows; FCFF values the whole firm.
- FCFE is discounted at cost of equity; FCFF is discounted at WACC.
- Relative valuation uses comparable ratios such as P/E, PEG, EV/EBITDA, EV/Sales, P/B, and EV/Capital Employed.
- Terminal value and discount rate assumptions usually drive most of a DCF output.
Traps
- Growth rate in Gordon growth must be lower than cost of equity.
- PE can mislead when leverage or one-off earnings distort EPS.
- EV, not market cap alone, reflects firm value for all capital providers.
Formulas in this chapter
Full sheet- Gordon Growth Model (DDM): P0 = D1 / (Ke - g)
- Cost of Equity (CAPM): Ke = Rf + Beta x (Rm - Rf)
- WACC: WACC = Ke x We + Kd x (1 - tax) x Wd
- Dividend Yield: Dividend yield = Dividend per share / Current price
- Earnings Yield: Earnings yield = EPS / Current price
- PEG Ratio: PEG = P/E ratio / Earnings growth rate (%)
- EV / Sales: EV / Sales = Enterprise value / Sales