Equity Instruments: Newsletter – October 12, 2012

Where we are in class…

Where you should be in the project…

Data Notes…

Now that you have the fundamental inputs for valuing your firm - the cash flows, the growth rate, the discount rate - you have to pick a valuation model. You can download a spreadsheet that will help in making this choice by going to

http://www.stern.nyu.edu/~adamodar/New_Home_Page/spreadsh.htm

To download any of the valuations that we will be doing in class in the next weeks, you can check out company valuations at

http://www.stern.nyu.edu/~adamodar/New_Home_Page/covals.htm

Miscellaneous FAQs

How do I decide on whether to use a stable growth, 2-stage or 3-stage model?

The choice is ultimately a subjective one. While historical growth is one input, you should also look at the growth of the market your firm serves and your firm's market share.

How do I know whether I should estimate FCFF or FCFE?

You do not, until you have picked a DCF model that fits your firm. I would estimate both. Once you have picked a DCF model, you can decide which one is more appropriate.

My company has negative earnings. Which stage model should I use?

If your firm has negative earnings, you first have to decide how you are going to normalize earnings. If you can normalize earnings instantaneously, you can then pick a stable growth or 2-stage model. If you cannot, you will have to forecast revenue growth over a period and an expected operating margin at the end; you would use these then to project free cash flows to the firm.