Question

Please provide a discussion of basic corporate value components and how we go about valuing these various components of value. Discuss the constant growth model and how we utilize WAAC in that valuation technique.

Answer 1

Basic corporate value components will be including various factors like cash flows related to the company, profits related to the company, and dividend related to the company.

Cash flows are the major components which are related to the the liquidity positions of the company and it will reflect the repayment ability of the company also so it will be considered for various valuation methods like free cash flows to the equity, free cash flows to the firm.

Profits are another component which are required for calculation of various valuation methods like price to earning methods as well as price to earnings growth methods so it is used for calculation of Earning per share and then it is used to calculate with various metrics.

Dividends are another component which are used for corporate valuation as they are considered in corporate dividend valuation models like dividend growth model in which it is assumed that, all the cash flows which will be accruing to the companies will be in form of dividend and the valuation should be accordingly done on the future cash flows in form of dividend by discounting it at present value with considering growth rate and required rate of return.

Constant growth model emphasized that the intrinsic value of company is present value of all future dividends and it is used to calculate whether this company is overvalued or undervalued and weighted average cost of capital will be taken as required rate of return in overall calculation of constant growth model because weighted average cost of capital is treated as hurdle rate in the valuation.