Intrinsic value of a firm

CFA Level I
#1

Having FCFE, or operating free cash flow (which is FCFF, right?), WACC, growth, and cost of equity, how do you calculate the intrinsic value of the firm?

#2

If you assume that all the free cash flow is paid as dividends (not a remote possibility by the way, that’s why it’s called *free*), then you will use the constant growth model. If not there are estimates for this which goes something like 20 times free casfhflow or 25 times, I don’t recall now. Other ideas?

#3

should I panic now ? is that for the exam ?

#4

ask map1.

#5

FCFF discounted at WACC

#6

can someone go over the logic of when is the intrinsic value = 0 or time value = 0. total value = intrinsic value + time value

#7

can someone go over the logic of when the intrinsic value = 0 or time value = 0. total value = intrinsic value + time value

#8

that’s an options question, not stock.

#9

I just cannot find a reference in the textbook. I found all over the place on the internet, all kinds of formulas, discounting CFO using WACC, or using the DDM approach, but I don’t know what to do with either of them.

#10

FCFF / (r - g) == This seems to be LII portion, unless LOSs have it somewhere. CP

#11

It is L2 material in equity valuation, we should not worry about it but the rule is FCFF @ WACC FCFE @ reqd return on equity. In practice, we never discount CFO, it has to be adjusted to either FCFF or FCFE. S

#12

yes, I meant FCFF/FCFE not CFO

#13

the time value of an option will only equal 0 at expiration. Think of the intrisic value by the amount that the option is in the money. If you have a call with a strike of 20 and the stock is currently at 25, then the intrinsic value of the option is 5. If the option was priced at 6, then the time value would be 1. An out of the money option will always have 0 intrinsic value and the premium will just be the time value. Hope this helps.

#14

mib20, this is not about options, this is about discounting FCFF and / or FCFE to obtain the intrinsic value of a firm or estimated value for a stock.

#15

replying to cfaiscomplex

#16

thanks mib20 also intrinsic value is the value if exercised immediately right? if not exercised then intrinsic value is 0?

#17

if exercised you make the intrinsic value, and if the option expires out of the money then the intrinsic value is 0. generally speaking though, you should never exercisize an option early because u will lose your time value. it should always be closed out by selling/buying an offsetting position.

#18

Could somebody please point me to where can I find in the CFAi textbooks information for how and/or costs to use to obtain the value of the firm from FCFF and/or FCFE?

#19

map1 Wrote: ------------------------------------------------------- > Could somebody please point me to where can I find > in the CFAi textbooks information for how and/or > costs to use to obtain the value of the firm from > FCFF and/or FCFE? I actually saw a Q on the mocks regarding this and had no idea how to do it! I need those pages as well!

#20

map1 Wrote: ------------------------------------------------------- > Could somebody please point me to where can I find > in the CFAi textbooks information for how and/or > costs to use to obtain the value of the firm from > FCFF and/or FCFE? It’s the same way as the dividient discount model: P=FCFE/(k-g)