Part One
Memo
Introduction
A way of valuing a stock price of the company grounded on the theory that the stock of the company is worth the summation of its payments of future dividend, discounted back to their present value is the dividend discount model (DDM). In simple words, it is used for valuing stocks grounded on the future dividends? NPV. In valuation techniques of discounted cash flow, the stock value is assessed grounded on PV of cash flow?s some measures. For cash flow, dividends are the most straightforward and cleanest measure for the reason that these clearly are cash flows that directly go to the investors. There three major components in DDM.
Intrinsic Stock Value (Valuation Summery)
Required Rate of Return (r)
Dividend Growth
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The department of finance needs to identify an expected return because for most investments, there is no assurance of a return. There is no guarantee of return, but is the average return on an investment if it were to be made a number of times. (Boundless, 2015)
Financing Decision
Financing decisions focus on how an organization can pay for its major projects. The financing decisions also determine the source of money in the organization. The business may require more cash for capital investments as compare to cash generated within the organization. There are two options for business to generate cash one is to obtain cash from owners, and other is to obtain cash from lenders (Kaplan Financial, 2015).
The dividend Decisions
A business might generate sufficient cash inflows if it is profitable. The directors of the company need to make a decision regarding paying dividends. The payout ratio along with the amount that needs to be paid must be specific if the management of the organization decides for paying dividends. Management of the company are directed by the principle of wealth maximization of shareholders When it comes to deciding whether to pay dividend or not, the organization might not pay dividends, if the profit can be capitalized somewhere else for generating future cash flows (Kaplan Financial,
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
Valuation refers to the procedure of converting forecast into an estimation of company assets or equity value. The four available models have been used to for JB HI-FI are including the discounted dividends (DDM), discounted abnormal earnings (RIM), discounted abnormal operating earnings (ROIM) and discounted cash flow (DCF).
Discounted Cash Flow Method takes the forecast free cash flows during forecasted horizon. Then we estimate the cost of capital (weighted average cost of capital) and estimate continuing value (value after forecast horizon). The future value is discounted to the present value. We than add back cash ($13 Million) and non-current assets and deduct total debt. With the information provided several assumptions had to be made to obtain reasonable values (life period of 30-years, Capital expenditures not to exceed $1 million dollars, depreciation to stay constant at $1.15 Million and a discounted rate of 10%). Based on our analysis, the company has a stand-alone value of $51 Million at the end of fiscal year end 1990 with a net present value of cash flows of $33 million that does not include the cash and non-current assets a cash of and non-current assets.
Discounted cash flow is a valuation technique that discounts projected cash inflows and outflows to evaluate the potential value of an investment. There are three discounted cash flow methods: Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR). The net present value discounts all cash inflows and outflows at a minimum rate of return, which is usually the cost of capital. The profitability index refers to the ratio of the present value of cash inflow to the present value of cash outflows. The internal rate of return refers to the interest rate that discounts cash inflow projections to the present to ensure that the present value of cash inflows is equivalent to the present value of cash outflows (Brown, 1992).
...ccurately reflects the intrinsic value of the company from the shareholders point of view and their expectations of future earnings.
When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a more flexible set of criteria than CAPM and takes advantage of mispriced securities
Miller, M.H. and Modigliani, F., 1961., Dividend Policy, Growth, and the Valuation of Shares. The Journal of Business, 34(4), pp. 411-433.
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financning have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business.
The following essay will expand on the usefulness and flaws of CAPM and other asset evaluation frameworks and in the end showing that despite all the evidence against CAPM it is still a useful model for determining asset investments.
Research on the Sources of Finance for a Business Firms sometimes need to raise finance for Working Capital and Capital Expenditure. Explain what each is and give examples. · Working Capital (or Revenue Expenditure) The working capital is made up of the current assets net of the current liabilities. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.
The return on Investment (ROI) is important because it describes the rate of return the company was able to...
Many organizations have maximized the use of cash on hand by effective cash management techniques and the use of short-term financing. This paper will discuss various cash management techniques and short-term financing methods used by organizations.
Smaller companies are much more likely to obtain an attentive audience with a commercial loan officer after the start-up phase has been completed. In determining whether to extend debt financing--essentially, make a loan--bankers look first at general credit rating, collateral and your ability to repay. Bankers also closely examine the nature of your business, your management team, competition, industry trends and the way you plan to use the proceeds. A well-drafted loan proposal and business plan will go a long way in demonstrating your company's creditworthiness to the prospective lender.
Sources of finance are the different methods for a business to earn and obtain money. There are lots of ways to obtain money but two large basic sources of finance, which are the “owner’s capital” and “capital borrowed”. They are also called internal sources of finance and external sources of finance. In those sources, they are mainly divided in two groups, which are short-term sources of finance and long-term sources of finance.