1. ©Cambridge Business Publishers, 2013 FINANCIAL STATEMENT ANALYSIS & VALUATION Third Edition Peter D. Mary LeaGregory A.Xiao-Jun EastonMcAnallySommersZhang

2. ©Cambridge Business Publishers, 2013 Module 13: Cash-Flow-Based Valuation

3. ©Cambridge Business Publishers, 2013 Discounted Cash Flow (DCF) FCFF = NOPAT – Increase in NOA FCFF = NOPAT – Increase in NOA The DCF valuation of common stock involves 5 steps: The DCF valuation of common stock involves 5 steps: 1. Forecast and discount free cash flows to the firm (FCFF) for the horizon period. 2. Forecast and discount FCFF for the post-horizon period, called the terminal period. 3. Sum the present values of the horizon and terminal periods to yield firm value. 4. Subtract the value of the firm’s debt (NFO) from the value of the firm. 5. Divide this amount by the number of shares outstanding to yield the estimated per share stock price

4. ©Cambridge Business Publishers, 2013 Discounted Cash Flow Model

5. ©Cambridge Business Publishers, 2013 Analysts’ Forecasts

6. ©Cambridge Business Publishers, 2013 End Module 13