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1、CHAPTER FOUR,McGraw-Hill/Irwin,Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.,Chapter 4,Prepared by: Stephen H. Penman Columbia University With contributions by Nir Yehuda Northwestern University Mingcherng Deng University of Minnesota Peter D. Easton and Gregory A. Sommers N
2、otre Dame and Southern Methodist Universities Luis Palencia University of Navarra, IESE Business School,Cash Accounting, Accrual Accounting, and Discounted Cash Flow Valuation,4-2,What You Will Learn From This Chapter,How the dividend discount model works (or does not work) How a constant growth mod
3、el works What is meant by cash flow from operations What is meant by cash used in investing activities What is meant by free cash flow How discounted cash flow valuation works Problems that arise in applying cash flow valuation Why free cash flow may not measure value added in operations Why free ca
4、sh flow is a liquidation concept How discounted cash flow valuation involves cash accounting for operating activities Why “cash flow from operations” reported in U.S. and IFRS financial statements does not measure operating cash flows correctly Why “cash flows in investing activities” reported in U.
5、S. and IFRS financial statements does not measure cash investment in operations correctly How accrual accounting for operations differs from cash accounting for operations The difference between earnings and cash flow from operations The difference between earnings and free cash flow How accruals an
6、d the accounting for investment affect the balance sheet as well as the income statement Why analysts forecast earnings rather than cash flows,4-3,The Big Picture in This Chapter,A valuation model is a method of accounting for value Discounted cash flow (DCF) valuation employs cash accounting for va
7、luation DCF Valuation and cash accounting for value does not work Move to accrual accounting for value in Chapters 5 and 6,4-4,A Reminder :Valuation Models for Going Concerns,The terminal value, TVT is the price payoff, PT when the share is sold Valuation issues : The forecast target: dividends, cas
8、h flow, earnings? The time horizon: T = 5, 10, ? The terminal value? The discount rate?,4-5,The Dividend Discount Model: Forecasting Dividends,4-6,Terminal Values for the DDM,A. Capitalize expected terminal dividends B. Capitalize expected terminal dividends with growth Will it work?,4-7,Some Financ
9、ial Math: The Value of a Perpetuity and a Perpetuity with Growth,The Value of a Perpetuity A perpetuity is a constant stream that continues without end. The periodic payoff in the stream is sometimes referred to as an annuity, so a perpetuity is an annuity that continues forever. To value that strea
10、m, one capitalizes the constant amount expected. If the dividend expected next year is expected to be a perpetuity, the value of the dividend stream is Value of a perpetual dividend stream = The Value of a Perpetuity with Growth If an amount is forecasted to grow at a constant rate, its value can be
11、 calculated by capitalizing the amount at the required return adjusted for the growth rate: Value of a dividend growing at a constant rate =,4-8,Dividend Discount Analysis: Advantages and Disadvantages,Advantages Easy concept: dividends are what shareholders get, so forecast them Predictability: div
12、idends are usually fairly stable in the short run so dividends are easy to forecast (in the short run),Disadvantages Relevance: dividends payout is not related to value, at least in the short run; dividend forecasts ignore the capital gain component of payoffs. Forecast horizons: typically requires
13、forecasts for long periods; terminal values for shorter periods are hard to calculate with any reliability,When It Works Best When payout is permanently tied to the value generation in the firm. For example, when a firm has a fixed payout ratio (dividends/earnings). Dividends are cash flows paid out
14、 of the firm (to shareholders) Can we focus on cash flows within a firm?,4-9,Cash Flows Within a Firm: Free Cash Flow,Cash flow from operations (inflows) Cash investment (outflows) Free cash flow Time, t,Free cash flow is cash flow from operations that results from investments minus cash used to mak
15、e investments.,4-10,The Discounted Cash Flow (DCF) Model,4-11,The Continuing Value for the DCF Model,A. Capitalize terminal free cash flow B. Capitalize terminal free cash flow with growth Will it work?,4-12,DCF Valuation: The Coca-Cola Company,In millions of dollars except share and per-share numbe
16、rs. Required return for the firm is 9% 1999 2000 2001 2002 2003 2004 Cash from operations 3,657 4,097 4,736 5,457 5,929 Cash investments 947 1,187 1,167 906 618 Free cash flow 2,710 2,910 3,569 4,551 5,311 Discount rate (1.09)t 1.09 1.1881 1.2950 1.4116 1.5386 Present value of free cash flows 2,486 2,449 2,756 3,224 3,452 Total present value to 2004 14,367 Continuing value (CV)*
