CCM - Private Company Valuation doesnt, question, includes, noticed

meghanjackson

Anyone noticed inconsistencies in the calcs in the Capitalised cashflow method? Blue boxes in the readings of CFAI notes dont (1+g) the numerator when calculating value of equity and or firm. Then in questions at the back it includes future growth (1+g)...then the second to last question on Excess Earnings Method doesnt use it......winds me up some of these inconsistencies.....

jacksparrow

Ok...


Page 655 #2: Multiply by (1+g) because it says "earnings are 100,000 for the year just ended


Page 677 #3: Multiply by (1+g) because you are given FCF and a growth in FCF so you assume that the FCF provided is current year.


Page 683: Do not multiply by (1+g) becasue the growth rate is designated as "future growth rate" which just doesn't sound right. If you notice on Schweser page 318 they multiply by a growth called "growth rate of residual income" which is the same name of the growth rate on CFAI page 655.

With all that said I'm sure CFAI will be very clear on exam day which values are current year and which are next year. That's one thing they do do fairly.

FinancialAnaly

I agree with kalo. U wud notice in the example in schweser when they value the intangibles they definitely increase then by 1+g and then divde by (r-g) in the EEM method. However in the EOC questions at the end of the chapter they just use the intangibles without applying the growth rate and divide it by (r-g)

scarecrow

That cause in #3 they give you the Long-Term growth rate of FCFF so you put that into the numerator. They never give you a long term growth rate of intangibles in #15, just a required rate of return (which is subtracted from growth rate in denominator). Therefore if they don't have you a long term growth rate of the companies intangibles than there is no reason to put anything else in the numerator. That's all I can come up with.

jarobi04

This is not P/E ratios - its valuing a private company using the capitalised cash flow method - maybe you should take a look before exam day. Last chapter of Equity book.

My question was concerning the End of Chapter questions. Q3 pg677 uses (1+g) in the
numerator in the calculation but in Q15 p683 (1+g) is not used in the numerator.

And Reggie - you stated you didnt know what i was talking about, but you were still quick to pass judgement...



Edited 2 time(s). Last edit at Monday, May 24, 2010 at 12:10PM by kalo1.

bingbingliang

I don't know what you're talking about but I know for P/E rations, in the numerator they don't use (1+g) if it is D1 (ie next periods/forward one period), but they use (1+g) if it is D0 (ie this periods dividend). Maybe this is the same concept?