Corporate valuation
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Valuationtechniquesandmechanics
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,DCF:DifferentApproaches,
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Same Ingredients…
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, DCF
▪ Different models but same underlying principals
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▪ The choice of model depends on the objective and the info
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rmation available f
▪ No “right” or “wrong” model, but once chosen must apply mod
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el in internally consistent way (e.g. discount cashflows to equ
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ity holders at cost of equity, cashflows to the firm at weighted a
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verage cost of capital) f f f
▪ It can be confusing:
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o People use different terminology f f f
o People use different notation f f f
▪ Always state assumptions!Always check definitions!
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, Dividenddiscount model (DDM) f f f
▪ By Myron Gordon (1959), hence also ‘Gordon’s Gr
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owth Model’ f
▪ Essentially: equities are ultimately only ‘worth’the ca
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sh that will be returned to shareholders
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o Much derided as simplistic
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o But, like CAPM, has an intuitive appeal, so sh
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ouldn’t be ignoredf f
o Often used in practice, e.g. Bloomberg
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▪ Problem: does not account for risk
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f
Valuationtechniquesandmechanics
f f f
,DCF:DifferentApproaches,
f f f
Same Ingredients…
f
, DCF
▪ Different models but same underlying principals
f f f f f
▪ The choice of model depends on the objective and the info
f f f f f f f f f f
rmation available f
▪ No “right” or “wrong” model, but once chosen must apply mod
f f f f f f f f f f
el in internally consistent way (e.g. discount cashflows to equ
f f f f f f f f f
ity holders at cost of equity, cashflows to the firm at weighted a
f f f f f f f f f f f f
verage cost of capital) f f f
▪ It can be confusing:
f f f
o People use different terminology f f f
o People use different notation f f f
▪ Always state assumptions!Always check definitions!
f f f f f
, Dividenddiscount model (DDM) f f f
▪ By Myron Gordon (1959), hence also ‘Gordon’s Gr
f f f f f f f
owth Model’ f
▪ Essentially: equities are ultimately only ‘worth’the ca
f f f f f f f
sh that will be returned to shareholders
f f f f f f
o Much derided as simplistic
f f f
o But, like CAPM, has an intuitive appeal, so sh
f f f f f f f f
ouldn’t be ignoredf f
o Often used in practice, e.g. Bloomberg
f f f f f
▪ Problem: does not account for risk
f f f f f
