Английский язык. Практический курс для решения бизнес-задач

10. amount owing to creditors for goods and services on an open account

11. amount due from customers for merchandise or services purchased on an open account

12. a company’s purchase of its outstanding stock

13. a loan for a specified amount for a fixed period of time (usually 1 to 10 years) and often with a fixed periodic repayment

Exercise 3*. Fill in the blanks using terms given below.

Introduction into the DCF Analysis

The notion that money has…… is a basic concept of finance. The sooner funds are received, the sooner they can be put to work in other new…… If funds are received later rather than sooner, the recipient forgoes the……. that could have been earned in the meantime. Therefore, to analyze the economic worth of investment opportunities, managers must take into account the timing of…….. as well as their amounts.

The rate of interest represents the rate at which……. funds can be exchanged for…… funds, and vice versa. The interest rate is the rate of exchange over time and is the tool for…….. cash flows to account for differences in timing. Time affects cash flows through the……… of compound interest.

The future value of a sum of money equals its present value…….. forward through time at the appropriate interest rate. Similarly, the present value of a future sum is its future value……….. back to the present. The present value of a……… of payments is the sum of the present values of its separate elements. In the case of level streams (……….), the computation of present value can be simplified using present-value tables.

The general DCF……. expresses the value of an asset as the sum of all payments the asset will generate, discounted to their present value. Using DCF techniques, a complex……. of cash flows extending over many time periods can be reduced to a single figure that is equivalent in value. The present value of a stream of cash…….. can be compared to the……… required to generate it. Similarly, two or more……… investments (each of which generates a complex cash flow stream) can be reduced to present values and compared directly. DCF techniques greatly simplify the……… of complex cash flow patterns.

Terms:

stream, valuation, adjusting, annuities, outlay, time value, discounted, investments, inflows, future, model, interest, cash flows, alternative, present, mechanism, pattern, compounded

Exercise 4. You are a Harvard Business School graduate hired as CFO by a major Russian company. Its CEO has heard about DCF analysis and wants to use it for valuing investment projects of his company. You have to explain to him the advantages and disadvantages of this method. Invent a dialogue between these two individuals using the following briefing materials.

What are the Pluses and Minuses of the DCF Analysis?

Advantages

Arguably the best reason to like DCF is that it produces the closest thing to an intrinsic stock value. The alternatives to DCF are relative valuation measures, which use multiples to compare stocks within a sector. While relative valuation metrics such as P/E, EV/EBITDA and price to sales ratios are fairly simple to calculate, they aren’t very useful if an entire sector or market is over– or undervalued. A carefully designed DCF, by contrast, should help investors steer clear of companies that look inexpensive against expensive peers.

Unlike standard valuation tools such as the P/E ratio, DCF relies on free cash flows. For the most part, FCF is a trustworthy measure that cuts through much of the arbitrariness and «guesstimates» involved in reported earnings. Regardless of whether a cash outlay is counted as an expense or turned into an asset on the balance sheet, free cash flow tracks the money left over for investors.

Best of all, you can also apply the DCF model as a sanity check. Instead of trying to come up with a fair value stock price, you can plug the company’s current stock price into the DCF model and, working backwards, calculate how quickly the company would have to grow its cash flows to achieve the stock price. DCF analysis can help investors identify where the company’s value is coming from and whether or not its current share price is justified.

Disadvantages