WGU D366 SECTION 3|EXPLAINS IMPACTING
VALUE VERIFIED TO PASS 2025/2026
Cash Flow Valuation
Rationale for Cash-Flow-Based Valuation
Value of common equity = Present value of expected future dividends
Cash-flow-based valuation and dividends-based valuation are complementary
Fundamental concepts include risk, rates of return, and weighted-average cost of capital
Distinguishing cash flows to the investor and to the firm
Importance of nominal versus real cash flows
Projection of continuing value and its computation
Cash-Flow-Based Valuation Approach
Focuses on free cash flows available for distribution to shareholders
Advantages include practicality in acquisition decisions and value creation
Disadvantages involve time-consuming projections and sensitivity to assumptions
Free Cash Flows
Conceptual Framework for Free Cash Flows
Assets = Liabilities + Shareholders' Equity as the basis
Categorization of assets and liabilities into operating and financing components
Balance sheet rearrangement to isolate free cash flows for equity shareholders
Measuring Free Cash Flows
Different methods for computation starting from statement of cash flows, net income, EBITDA, or
NOPAT
Adjustments needed for valuation purposes
Judgment calls on financial asset classification and cash management efficiency
Objective-driven choice of free cash flow measure
, Firm Value
Valuation Models for Free Cash Flows for Common Equity Shareholders
Present Value of Free Cash Flows (FCFE) Approach
Application and tools for calculating v0 and continuing value
Challenges in achieving consistency and circularity in equity value estimates
Valuation Models for Free Cash Flows for All Debt and Equity Stakeholders
Present Value of Net Operating Assets (VNOA)
Calculation of Equity Value (E0)
Considerations in aligning market-value-based weights with value estimates
Earnings-Based Valuations
Valuation: Earnings-Based Approach
Theoretical foundations of residual income valuation
Practical applications and equivalence with dividends and free cash flow valuation
Internal consistency for reliable estimates and corrections
Rationale for Earnings-Based Valuation
Different valuation implications compared to dividends and free cash flows
Focus on wealth creation using book value and expected future earnings
Accrual accounting relevance and accuracy in reflecting economic performance
Equivalence of Valuation Methods
Valuing Shareholders' Equity
Valuing shareholders' equity based on capital invested plus earnings is equivalent to valuation using free
cash flows or dividends over the firm's life.
Residual income approach aligns with valuation based on free cash flows or dividends.
Earnings-Based Valuation
Practical Advantages
Earnings receive significant attention and are a logical starting point for valuation.
VALUE VERIFIED TO PASS 2025/2026
Cash Flow Valuation
Rationale for Cash-Flow-Based Valuation
Value of common equity = Present value of expected future dividends
Cash-flow-based valuation and dividends-based valuation are complementary
Fundamental concepts include risk, rates of return, and weighted-average cost of capital
Distinguishing cash flows to the investor and to the firm
Importance of nominal versus real cash flows
Projection of continuing value and its computation
Cash-Flow-Based Valuation Approach
Focuses on free cash flows available for distribution to shareholders
Advantages include practicality in acquisition decisions and value creation
Disadvantages involve time-consuming projections and sensitivity to assumptions
Free Cash Flows
Conceptual Framework for Free Cash Flows
Assets = Liabilities + Shareholders' Equity as the basis
Categorization of assets and liabilities into operating and financing components
Balance sheet rearrangement to isolate free cash flows for equity shareholders
Measuring Free Cash Flows
Different methods for computation starting from statement of cash flows, net income, EBITDA, or
NOPAT
Adjustments needed for valuation purposes
Judgment calls on financial asset classification and cash management efficiency
Objective-driven choice of free cash flow measure
, Firm Value
Valuation Models for Free Cash Flows for Common Equity Shareholders
Present Value of Free Cash Flows (FCFE) Approach
Application and tools for calculating v0 and continuing value
Challenges in achieving consistency and circularity in equity value estimates
Valuation Models for Free Cash Flows for All Debt and Equity Stakeholders
Present Value of Net Operating Assets (VNOA)
Calculation of Equity Value (E0)
Considerations in aligning market-value-based weights with value estimates
Earnings-Based Valuations
Valuation: Earnings-Based Approach
Theoretical foundations of residual income valuation
Practical applications and equivalence with dividends and free cash flow valuation
Internal consistency for reliable estimates and corrections
Rationale for Earnings-Based Valuation
Different valuation implications compared to dividends and free cash flows
Focus on wealth creation using book value and expected future earnings
Accrual accounting relevance and accuracy in reflecting economic performance
Equivalence of Valuation Methods
Valuing Shareholders' Equity
Valuing shareholders' equity based on capital invested plus earnings is equivalent to valuation using free
cash flows or dividends over the firm's life.
Residual income approach aligns with valuation based on free cash flows or dividends.
Earnings-Based Valuation
Practical Advantages
Earnings receive significant attention and are a logical starting point for valuation.
