Palepu 3e ch8
Palepu 3e ch8
Palepu 3e ch8
LO3: Understand the way in which terminal value assumptions affect overall
valuations
COMPUTING A DISCOUNT RATE
Only the risk that an asset contributes to (a fully diversified) portfolio must be compensated
because of its covariance with the returns of the other assets.
Similarly, the relationship between equity and asset betas depends on leverage:
Equity beta risknew = (Asset beta risknew – (Debt beta risknew × %debtnew)
× (1 – tax rate)) / %equitynew
DETAILED FORECASTS OF PERFORMANCE
Competitive equilibrium
• Abnormal earnings on incremental sales may
assumptions only on incremental be assumed
sales
It is useful to check
Stock prices of
assumptions used Sensitivity analysis
publicly traded
against the time for different
series trends for a companies are
useful as a economic
company’s scenarios is a
comparison for
performance good idea.
value estimates.
ratios.
SOME PRACTICAL ISSUES IN VALUATION
• In practice, analysts must deal with a number of issues that have an
important effect on valuation, including:
• Case 1 Qantas
Part E Valuation
John 4:23 But the hour comes, and now is, when the true worshippers shall worship the
Father in spirit and in truth: for the Father seeks such to worship him.