Corporation Valuations

Corporation valuations. Programm.Theoretical framework that overview of the valuation methods.Discounted Cash Flow (DCF) typical mode of application.Estimate of different cash flows.Procedures for estimating the cost of capital.Procedures for estimating the growth rate.Theoretical and application problems of the use of multiple. The name of the course is corporate valuation, and we will study how can we value any asset (bond, firm, investment project and so onFirst of all, we have to understand the factors determining any assets, and understand how these values can be maximized.

Risk-return models

Now we consider the models of corporate finance that consider the relationship between risk and return (direct relationship, the higher the risk, the higher the return). These model are based on the assumption that the investor is well diversified: it has a wide portfolio including many securities. Therefore, we will see that these model consider only the market risk (systematic risk). We can use all these models to estimate the cost of equity. These models can be divided into 3 categories:

1.Multifactor Models:

Among these models, the most famous ones are the CAPM (Capital Asset Pricing Model) or the APM (Arbitrage Pricing Model). Multifactor Models start from the definition of market risk in the broadest sense and measure it through the beta by using historical data. Then, they translate such measure in terms of expected return.

2.Regression models or Proxy models:

They start from the observation of returns and try to explain the differences between returns in the long run by using some characteristics of the company as the market value or size. The relationships so identified are used to predict the expected returns of individual stocks. Fama and French have verified that the actual returns (1963-1990) were highly correlated with the market to book value (+) and the size (-).

3.Models based on the implied rate of return:

To apply these models we need an equity model. The easiest equity model is the Gordon Model (see chapter 5):