Course Intro and Fundamental Valuation

Equity Valuation in R

Cliff Ang

Senior Vice President, Compass Lexecon

Time Value of Money

You will need to be compensated to forego receiving $ \$ $100 today in favor of receiving $ \$ $100 tomorrow. Why?
- Uncertainty / Risk
- The higher the risk, the larger the compensation
$ \$ $100 today is worth more than $ \$ $100 tomorrow

ONE YEAR

$ \frac{\$100}{(1 + 10\%)^1} = \$91 $

fv <- 100
r <- 0.10
fv / (1 + r)^1

90.90909

# Check
90.90909 * (1 + r)

TWO YEARS

$ \frac{\$100}{(1 + 10\%)^2} = \$83 $

fv <- 100
r <- 0.10
fv / (1 + r)^2

82.64463

# Check
82.64463 * (1 + r)^2

Market Value Balance Sheet:

Assets = Liabilities + Equity

Same accounting identity must hold but in Market Value not Book Value

Free Cash Flow to Equity

Equity Valuation in R