ENG ELC 220 Lecture Notes - Lecture 19: Sensitivity Analysis, Market Risk, Cash Flow

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In order to get to the actual task of valuing a company, you need first need to deal with three issues: Compute the cost of capital to discount the forecasts. Ake forecasts of financial performance in terms of abnormal profits and book values, or free cash flows, over the life of the firm. Choose between an equity valuation or an asset approach and understand the consequences. The inputs in the aforementioned chapters have to be discounted by the cost of equity. One approach to estimating the cost of equity is the capital asset pricing model (capm), which assumes that investors hold a portfolio of investments and only get compensated for the risks that an asset contributes to the portfolio. This implies that the investor is not compensated for diversifiable risk. The risk premium is the market risk minus the risk-free rate. The beta indicates the systematic risk of the equity.

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