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# Finance and Accounting - Essay Example

## Extract of sample Finance and Accounting

‘000 Rustic plc ?‘000 Market value of stocks (3x10)=30000 (1.62x8)=12,960 ROI 4,500, 2,952, Fixed assets 20,000 20,000 Current Assets 7,000 9,000 Current Liabilities -3,000 -5,000 Net assets 24,000 24,000 Long term debt @ 5% 4,000 8,000 Shareholders’ funds 20,000 16,000 Long-term investment 24,000 24,000 126, 000 108,960 Shareholder Value Added approach to estimation of cash flows for the first 5 years with and assumption of growth of dividends in year 6 onwards at an annual rate of 4% in perpetuity. The cost of capital is estimated at 20% Terminal Value = the NOPAT (t + 1) x (1 - g / ROIC) / wacc - g NOPAT: Net Operating Profits after Taxes ROIC: return on the invested capital total present values 7,526 terminal value 14,663 non operating assets value 500 total value of rustic plc 26688 less debt -2800 equity 19888 outstanding shares 3000 value per share 6.63 2. Compare the valuation methods used above Of the models listed above, the most optimal and theoretical approach for stock valuation is dividend valuation approach. 2.1Dividend discount model This model estimates the value of shares at discounted value based on the future dividends payment. It argues that the value of a share is worth the actual present value in terms of all the future dividends that a company will pay. This model is the most effective method for valuation because it places the values of shares on the real cash flows that the investors receive. On the other hand, the dividend discount valuation model is discounted cash flow based on the dividend forecasts over, many stages. Brown & Medoff, (1988), stated that the dividends that have not become ex dividends are not required for forecasting because they have just been announced. The forecast are also based on the detailed financial models running over 2 to 5 year. This model also assumes the constant growth rate. The method is useful when evaluating then value of a company in the short and medium term, however, in long term valuation, it may not be suitable but the management can only use this model if the shareholder agree to accept the assumptions that the dividend payout policies will be maintained for future calculations ( Jensen, &, Ruback, 1983, pp5–50).. The model has limitation that makes it less appropriate. For example, the model has imitations making it difficult to use for short term forecasting as opposed to the long run because the system dividends on the ability to while the order details of host companies have an attitude while most companies use the links because it is not subscribed. Most companies also understand that the models Is dependent on the input data. Finally, the divided discount model is also not preferred by other companies because the model omits cash flows (PWC, 2007, 1-50). 2.2. The shareholder value added approach This is the actual value that a company places on the stakes of accompany. For example, this model is useful for determining worth of a company’s shares or determining whether the investments expenses are justified. SVA model represents all the economic profits ...Show more

## Summary

Finance and Accounting Name Professor Institution Course Date 1.Dividend valuation model assuming a dividend cover of 2, growth in dividend of 10% per year in perpetuity and assuming a cost of capital of 20% terminology formula Terminal Value FCF ( t + 1 ) / wacc – g t + 1 first year after the forecast period WACC weighted average cost of capital g: growth rate normalized cash flow 45,000 Growth rate expected after the forecast period is 10% WACC 12% total (\$ 45,000 x 1.01) / (.12 - .1) = \$ 44554 / 0.02 = \$ 2227700 It is important to note that the FCF = After Tax Operating Tax Cash Flow - Interest (1 - t ) - PD - RP - RD – E Where: 1…
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