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Financial Valuation Models: Dividend Discount, Discounted Cash Flow, and Abnormal Earnings, Exams of Political Science

A concise overview of three key financial valuation models: the dividend discount model, the discounted cash flow model, and the abnormal earnings model. It outlines the theoretical foundations, formulas, and practical applications of each model, highlighting their strengths and weaknesses. The document also explores the relationship between these models and the concept of abnormal earnings, providing insights into how to assess a company's value based on its profitability and capital structure.

Typology: Exams

2024/2025

Available from 12/17/2024

Fortis-In-Re
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Columbia LSE, Final Exam #1
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  • Columbia LSE, Final Exam #
In Theo the equity ", Whal does the dividend discount model accomplish? — ANS-Txpresses value as the present yalue of all future dividends. What is the formula for the dividend discount model? — ANS-Equity Value = Mividend()/Q +r)o1) + Mividend(2)/0 +r)*2).... Drawhacks to Dividend Discount Model? — ANS-1. Tiquity value is crealed by Investing and Operational activiles (not financing) 2, Dividends are a by-product of value creation, nol the calalyst. In theory, whal is the Discounted Cash Plow Model (DCT)? - ANS—Determines equily value by finding the Present Value of all Tree Cash Flow to Equity Molders and debt holders (in our class we only do equity holders to find NBY)} Tlow do you derive FCF? — ANS-1. OCI'(1) - Investment (1) - DEBT AND EQUITY 2. RBIT + D/A +/— WC - Capex Just EQUITY 3. Net Profit (1) - BVA) + BYD() 4. Dividends 5. Net Profit - CH(BVE) What is the key lo accurate future FCI Predictions? - ANS—-Tull set of predicted future (condensed) income sheets and balance sheets. In words, What is abnormal Earnings? - ANS—Net profit adjusted for the capital charge. What is the formula for discounted abnormal Earnings (2)? — ANS—Equity Valuc = Net income — R*BVE Equity Value = BYE (o) + (Net profit(]) — ()#BVE(o))/(tr)on... Benefits to discounted abnormal earnings model? — ANS—1. Inuitive appeal (i.e. if firm can only achieve normal ROR on BY, investors shouldn't be willing to pay more)