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Valuation Module 2

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Valuation Module 2

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Valuation Module 2


This is the second module on Valuation from The middle Road. This module elaborates the methodology of calculating the present value of equity and the firm using the cash flow method using the cost of equity, cost of debt, and the weighted average cost of capital as discount factors. The tutorial shares an overview of the Capital Asset Pricing Model, Income Statement, three-step valuation model, financial ratios especially Interest Coverage among others. An excellent video to understand the basic foundation involved in fundamentally valuing a firm.

A brief look at an income statement and how to derive net income from given operating revenues.

Image | WACC | The middle Road



Question. Refer to the video for its solution.

Before referring to the question, check out Concept of Present Value if you do not know about it. A brief tutorial is present under Online Learning section on The middle Road or you can check out the link here.

Question: You are analyzing a company with the following attributes. The risk-free rate is 1.46% and market risk premium for the company is 6%. The company is traded on Straits Times (Singapore equity exchange index) and has a Beta of 0.97. The default spread for and the default spread of the firm is 0.94%. Assume effective corporate tax rate in Singapore to be 15%. Further, the cash flows for the company are mentioned below. Find cost of equity, cost of debt, WACC, current value of equity, and current value of the firm. Value of outstanding debt is 105. 

Year               Cash Flow to Equity                 Interest (long term)                Cash Flow to Firm

1                                  50                                              2.46                                                    52.46 

2                                  60                                              2.46                                                    62.46

3                                  60                                              2.46                                                    62.46

Terminal Value       710                                                                                                         814





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