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of equity at date t, Pt, is the difference between At  and net debt at time t, NDt , as follows:
    Pt = At - NDt
FCFVM and AOPVM (No proof at this stage!)
Free cash flow valuation model:

 where FCFt+i = CFOt+i – lNVt+I
Abnormal operating profit valuation model (AOPVM):
 
 where
Identifying value drivers of the AOPVM
An alternative way of writing the AOPVM is as follows:

 where RNOAt+i = NOPATt+I / NOAt+I-1 represents the expected return on net operating assets in period t+I.

Value drivers in the AOPVM are therefore :
Excess of RNOA over the WACC (i.e. cost of capital for operations)
Growth in book value of net operating assets

Valu-Co plc Part 2: Equivalence of FCFVM and AOPVM with DVM and AEVM
Slides 14-17 show the following for Valu-Co plc:
Calculation of free cash flow for 2010, 2011, 2012
Reformulation of Valu-Co’s balance sheet to show book value of net operating assets (NOA) and net debt (ND)
Valuation based on FCFVM assuming that the cost of capital for operations is
Valuation based on AOPVM
Note that Valu-Co example (i) ignores company tax and
(ii) assumes that                           .  It is more difficult to
show equivalence of all four models without these
assumptions!
Calculation of free cash flow for 2010, 2011, 2012
Reformulation of Valu-Co’s balance sheet to show book value of net operating assets (NOA) and net debt (ND)
Valuation based on FCFVM

First, the value of the operations of the business are valued as follows:

Second, the value of equity is calculated as follows:
 Pt = At – NDt  = 5,450 – 1,050 = 4,400

Note that this is the same as for the DVM and AEVM
Valuation based on AOPVM
Using AOPVM, the value of the operations of the business is given by:

 where and
 RNOAt+i = OPt+I / NOAt+I-1= 545/3250=16.8%
Again, deducting ND of 1,050 gives an equity value of 4,400 and hence all four valuation models – DVM, AEVM, FCFVM, and AOPVM –  are equivalent

3. Implications and limitations of analysis for understanding role financial statements in equity valuation
Analysis shows that accounting valuation models (ie: AEVM and AOPVM) are consistent with ‘rational’ valuation models based on cash flows (ie: DVM and FCFVM)
Analysis shows that forecasting accrual accounting variables such Operating Profit and Net Profit provides a useful basis for predicting future cash flows.  In particular:
Dividends are ‘paid out’ of earnings and hence forecasting earnings is useful for forecasting dividends!
Free cash flow can be estimated from predicting future operating profit, ‘backing out’ expected cash flow from operations, and deducting 由英语论文网www.51lunwen.org整理提供 future expected investment
Implications and limitations (continued)
Follow-up Question
Reported balance sheet for 2009 and forecasted balance sheets for 2010, 2011, 2012:  follow-up question
Forecasted income statement, dividend payout, ROE, and growth information for 2010, 2011, and 2012: follow-up question
Reformulation of Valu-Co’s balance sheet to show book value of net operating assets (NOA) and net debt (ND): follow-up question
Calculation of free cash flow for 2010, 2011, 2012: 本论文由英语论文网提供整理，提供论文代写，英语论文代写，代写论文，代写英语论文，代写留学生论文，代写英文论文，留学生论文代写相关核心关键词搜索。