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Corporate valuation using the free cash flow method applied by Carl McGowan

By Carl McGowan

The worth of an organization is the discounted current price of destiny money flows supplied by way of the corporate to the shareholders. The valuation procedure calls for that the company monetary selection maker confirm the long run loose funds move to fairness, the momentary progress expense, the long term progress cost, and the mandatory fee of go back according to marketplace beta. The publication discusses the Black-Scholes alternative pricing version and the weighted general rate of capital. the target of this e-book is to supply a template for demonstrating company monetary administration utilizing a true corporation - Coca-Cola. the knowledge utilized in this publication comes from the monetary statements of Coca-Cola to be had on EDGAR. different facts are from SBBI, Yahoo! Finance, the U. S. Bureau of financial research, shares, Bonds, money owed, and Inflation, marketplace effects for 1926 -2010, 2011 Yearbook, vintage variation, Morningstar, and US division of the Treasury

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Example text

An alternative method to calculate the return is to subtract the beginning value from the ending value and dividing by the beginning value. Both returns are adjusted for dividend and stock splits. The returns used are arithmetic returns. 2 contains the regression results for the regression between the returns for the S&P 500 and for Coca-Cola using Excel. The independent variable is the return for the S&P 500 (x-axis), and the dependent variable is the return for Coca-Cola (y-axis). Both returns are adjusted for dividends and stock splits.

The value of the stock at the end of the supernormal growth period is the discounted present value of all of the future FCFE and is computed from P0 = FCFE1/(k − g). The difference is that the present value of a share of stock at time = t is equal to the anticipated free cash flow to equity at time = (t + 1). Beginning with time = (t + 1), the investment returns to the long-term growth rate with both k and g becoming constant and k being strictly greater than b. Since we are using a super-normal growth period of five years, the terminal value of the stock is P5 = FCFE6/(k − g).

A beta coefficient greater than 1 implies that returns for the stock move more than the market and a beta coefficient less than 1 implies that returns for the stock move less than the market. The former is aggressive stock and the latter is defensive stock. In this chapter, we show how to retrieve data from the Internet, how to compute returns for both the market index and the stock, and how to run a linear regression to determine the beta coefficient to measure the systematic risk for the stock.

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