Question

1. Verizon’s free cash flows to the firm are projected to be as follows for the next 5 years (all figures in billions):

2020	2021	2022	2023	2024
12.36	12.93	13.62	14.36	14.97

How will your confidence in these assumptions change which model you listen to? For instance, if you were 60% confident of your assumptions for each of the P/E, DDM, and DCF models, which one would you rely on? Think about how much a change in your assumptions changes share prices. There isn’t necessarily a mathematically correct answer to this last question. There is, however, an economically reasonable way to justify your thinking regardless of the model you choose to rely on. The internal consistency between what you pick and how you justify it will matter. Would your decision change if you were 60%, 70%, and 80% of the three models, respectively (i.e. less confident of your assumptions for the P/E model relative to the other two)?

Answer 1

I will rely on the concept of DCF method for valuation in the given data condition, as the DCF model is based on the concept of discounting the value of future cash flow.

Here, the price of a share is simply calculated as net asset value per share with assumption of no charge of debt or other liabilities. Any change in the assumption like charge in cash flow of debt , tax , external liability or any other have direct impact on the value of share of the company.

• As any increase in the charge will reduce the net asset value for firm

There will be no change in my decision with the of confidence level on the different model , as the valuation should be conducted based on the theory of future cash flow (only data available) in the given situation.

The calculation based on P/E should not have much impact in the situation as the calculation is based on multiplier approach as comparison  to the other companies of the same industry.