Valuation

In this assignment, the basic task is to apply valuation techniques that are covered in the lecture. You could apply DDM, DCF, RE or AEG model(s) in your coursework. Valuation models determine the present value of an asset’s expected future cash flows. These kinds of models take two general forms: multi-period models such as discounted cash flow models or single-period models such as the Gordon model. These models rely on mathematics rather than price observation.

The steps in valuations:

1. Choose your company from the London Stock Exchange. Manufacturing firms are preferred as valuations for banks, insurance companies will be difficult.
2. Collect financial statements for last five years. You need this to estimate growth in earnings and to examine the trend in net income, cash flow, residual earnings, AEG etc.
3. Forecast earnings ,dividends, cash flows RE or AEG. You could use analyst’s forecasts of earnings and convert them into a valuation model.
4. Clearly state how did you estimate the parameters of you valuation model. For example, How did you estimate cost of capital.
5. Indentify the sources of uncertainty in your model by conducting a sensitivity analysis.
6. Provide a range of valuation of equity for the firm (for example £10-12).
7. Compare your valuation with the current market price.

The pro-forma valuation models are described in the lecture.

The marking scheme.