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Lecture 15

FIN 302 Lecture Notes - Lecture 15: Detroit Bankruptcy, Special Dividend, Berkshire HathawayPremium

3 pages41 viewsWinter 2017

Department
Finance
Course Code
FIN 302
Professor
Denis Sosyura
Lecture
15

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SESSION 15: STOCK VALUATION - PART 1
Today is all about what Investment Banking Analysts do
-Stock basics: key terminology
-Discounted Cash Flow valuation (DCF)
-Interactive in-class practice
STOCK BASICS
Stock - a share of ownership in the firm, which entitles the owner to:
-Receive dividends
-Residual payments - the shareholders are paid last after all debts are paid back (bank
loans and bonds)
-Vote at stockholders’ meetings on key issues
-Request financial information from the company
Dividend - distribution of company’s profits to shareholders
-Regular dividend - scheduled dividend paid every quarter
-Special dividend - one-time distribution of cash to shareholders
DISCOUNTED CASH FLOW (DCF)
Rationale: company’s value is derived from a forecast of future free cash flows (FCFs) generated by the
firm
-Discounted value of future cash flows
-Step By Step Methodology:
1. Project FCFs in explicit forecast (5-7 years)
1.1. The usual staple is 5 years,
1.2. Value the total future cash flows
2. Estimate Terminal Value (TV) at the end of the explicit forecast
2.1. Usually estimates as a perpetuity, after the explicit forecast period (years
past year 5)
2.2. We assume the companies will last forever
2.3. Value of all future cash flows after the explicit forecast period
3. Value of operating assets (VOA) = PV(FCFs) + PV (TV)
3.1. Operating Assets - cash flows from operating activities
4. Enterprise value (EV) = VOA + market value of non-operating assets (financial
securities, excess cash, collection of paintings)
4.1. Enterprise Value - VOA - general explicit operating cash flows
4.2. Value of the companies that produce the actual assets
4.3. Non-operating assets
4.3.1. Collections of painting from the city of Detroit was non-
operating, but important for the Detroit bankruptcy
4.3.2. Lehman Brothers - portfolios and securities
4.3.2.1. They must be included because they are not included
with the FCFs
5. Value of equity = EV - market value of debt
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