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DCF Valuation II; Test

DCF Valuation II; Test. A Corporate Governance Discount. You are valuing a company with extremely poor corporate governance. The firm is badly managed and badly run and you have estimated a DCF value of $ 100 million for the firm. Should you discount this value for poor corporate governance Yes

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DCF Valuation II; Test

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  1. DCF Valuation II; Test

  2. A Corporate Governance Discount You are valuing a company with extremely poor corporate governance. The firm is badly managed and badly run and you have estimated a DCF value of $ 100 million for the firm. Should you discount this value for poor corporate governance • Yes • No

  3. The R&D Effect You have just finished a DCF valuation of a pharmaceutical company and arrived at a value per share of $ 20. However, you used the conventional accounting numbers in arriving at your cash flows and discount rates. You decide to capitalize R&D and revalue the firm. What will happen to your value per share? • It should remain unchanged. Money spent is money spent. • It should go up. Earnings will increase when you capitalize R&D • It should go down. Reinvestment will increase when you capitalize R&D • Any of the above, depending on the company.

  4. The Distress Factor You are valuing a distressed company, with negative earnings and a significant debt overhang. You estimate expected cash flows, making realistic assumptions about improving margins, and a high cost of capital that reflects the high risk and compute a value of $ 1 billion for the equity in the firm. Given your assumptions, which of the following it likely to be true about your valuation: • It will be too low • It will be a reasonable estimate • It will be too high

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