ACTG 3000 Chapter Notes - Chapter 8: Stock Valuation, Capital Asset Pricing Model, Systematic Risk
5 Oct 2016
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Discount rates can be calculated under each of these approaches as: cost of equity (equity valuation, weighted average cost of capital (wacc) (business asset valuation, required return on operating assets (operating asset valuation) Forecasting task itself is divided into 2 components: detailed forecasts over a finite number of years, forecast of terminal value, which represents a summary forecast of performance beyond period of detailed forecast. To value a company"s equity (directly) the analyst discounts abnormal earnings (growth), abnormal roe, or cash flows available to equity holders. Proper discount rate to use is cost of equity. Investors holding a portfolio of investment only care about risk that an asset contributes to the portfolio. Risk is labeled as beta and is the risk created by the correlation between assets returns and returns of other investments in the portfolio. Capm therefore expresses cost of equity as sum of required return on riskless assets plus a premium for beta or systematic risk:
