Fundamental Valuation

Equity Valuation in R

Cliff Ang

Senior Vice President, Compass Lexecon

Fundamental Valuation techniques

  • Free Cash Flow to Equity (FCFE)
  • Dividend Discount Model (DDM)
Equity Valuation in R

Free Cash Flow to Equity Model Recap

Value of Firm's Equity equals Present Value of Free Cash Flows to Equity discounted at the Cost of Equity

$$ V = \sum_{t=1}^T FCFE_t / (1 + k_e)^t + [(FCFE_T (1 + g) / (k_e - g) ] / ( 1 + k_e)^T $$

Steps:

  • FCFE during projection period
  • Terminal Value
  • Add the two together to get Equity Value
Equity Valuation in R

Dividend Discount Model Recap

  • Value = PV of Projected Dividend Payments

  • Shortcut for dividends growing at a constant rate:

$$ V = \frac{div_t (1 + g)}{(k_e - g)} $$

Equity Valuation in R

Let's practice!

Equity Valuation in R

Preparing Video For Download...