1. CH. 8 PROSPECTIVE ANALYSIS: VALUATION IMPLEMENTATION

2. Computing a Discount Rate
Weighted average cost of capital (WACC): weighting the costs of debt and equity capital according to their respective market values
Market value for debt: use book value
Market value of equity: “insert” target ratios of debt to capital and equity to capital.
Estimating the cost of debt: interest rate on the debt (net-of-tax)
Estimating the cost of equity: use Capital Asset Pricing Model (CAPM)

3. Terminal Values
Remain constant
Grow at the assumed sales growth rate
Using multiple
Selecting terminal years: usually 5-10 year forecast horizon

4. Dealing with Accounting Distortions
Self correcting nature of double-entry bookkeeping, estimated values will not be affected by accounting choices, as long as the analysts recognizes the accounting distortions

5. Dealing with Negative Book Values
Makes it difficult to use the accounting-based approach to value a firm’s equity
Approach to handle this problem:
Value the firm’s assets rather than equity
“Undo” accountants’ conservatism by capitalizing the investment expenditures written off
Start from the observed stock and work backwards