Reference no: EM133765731

Overview

In the last module, you forecast the firm's income statement and balance sheet. This forecast gave us the firm's free cash flows (FCF), which you discounted to get the enterprise value (EV). From the EV, you subtracted debt and added the cash balances to get the firm's equity value. You took this equity value and divided it by the shares outstanding to get an estimate of the firm's price per share.
With a calculated price per share, you could compare the firm's traded price per share with our value and determine if the share price was priced too high, just right, or too low. In a way, you were the Goldilocks of share price analysts!

In this module, you will continue with the valuation of firms, but this time using multipliers, transactions, and the dividend discount model (DDM). These methodologies yield approximations to the company's share price. So, you may ask what is the advantage of that? After all, the free cash flows gave us a much more accurate valuation.

The truth is that the estimation of share prices using multipliers, transactions, and the DDM make for quick and dirty estimates of what the share price is. Most firms do not calculate their own share price using FCFs; instead, they rely on equity analysts to do that. The problem that arises then is that many firms do not believe in the assumptions made by equity analysts; after all, the firm's insiders have access to all the data that can be used to forecast prices and the equity analysts have only limited access. So, the firm can calculate its share prices quickly using these methods.