What is the difference between the two? Thank you in advance.
- CCM is basically a single-stage free cash flow model:
To get firm value:
If you want to derive equity value, either you subtract market value of debt from firm value, or you do:
Useful if valuing small private firms with no comparables available and stable growth is reasonable.
Rarely used but applicable to small firms with significant intangibles.
Calculate required return on working capital and fixed assets (r would be given in the exam): required return = (r * working capital) + (r * fixed assets)
Calculate “excess earnings” or residual earnings: EE = NI (normalized) - required return previously calculated
Calculate the value of intangibles: basically a growing perpetuity with an assumed “g” and the corresponding “r” for the intangible assets: V = EE*(1+g)/(r-g)
Sum the value of the intangibles to the book value of fixed assets and working capital. [Remember that you only calculated the required return on WC and FA to find EE, so don’t use that values to find firm value!!]
Basically different methods of valuing private companies, I hope it’s clear now.
You are awesome, Sharky7!! Thank you very much. BTW, your quote in your sig is on my list of motivational quotes that I read every time I study
@Sharky7 : on Curriculum reading 37 EOC no 15, i got my answer 218.06 instead of 205.71
do you agree ?
if using CCM what is your answer ?
I’ll have a look now and let you know.
I got 205.71 M and the reason is because you have calculated EE * (1+g) and you don’t have to. At the beginning of the item set it is said “he projects the following data for 2009”, and you are in 2008. So your EE of 28.8 M is already EE1.
Hence, 28.8/(0.20-0.06) = 205.71 M
I hope it helped.
Ok thanks Sharky.
it’s same like DDM case, D1 is already given instead of D0.