Equity Valuation: Models from Leading Investment Banks

4

Introduction

In Part I we discussed the main input factors of FCFF models. In Part II we will explain how investors can apply the model in practice. Figure 4.1 maps the FCFF approach. We will apply the model to Baidu.com, Inc., a Chinese internet company listed on NASDAQ. Part II is structured as follows. In Chapter 5, we demonstrate how analysts of leading investment banks formulate standard FCFF models. Financial analysts usually incorporate expected values of various input factors into FCFF models. However, the inputs into FCFF models are highly uncertain. In Chapter 6 we introduce the Monte Carlo method and incorporate distributions of possible realizations of our main value drivers into our FCFF model.

Figure 4.1 FCFF model