FIN 630 RELATIVE VALUATION HOW CAN WE REVISE THE FCF MODEL BY USING MARKET COMPARABLES AND MULTIPLES TO MAKE IT HIT CORPORATE TARGETS WE MIGHT HAVE?
Relative Valuation How can we revise the FCF model by using market comparables and multiples to make it hit corporatetargets we might have? For example, we might want to see what assumptions might justify the market'svalue on a stock -- how can we use the model consistently for this purpose?Booms and Busts In housing markets, there is a positive correlation between prices and trading volume.When there is a housing boom, many houses sell at, or even above, the prices asked by sellers.In times of bust, homes sit on the market for a long time with asking prices that exceed the prices that canreasonably be expected.How can this be explained?Repurchases –19 December 2000 an article appeared in The Wall Street Journal discussing stock price declines thatfollowed share repurchases made by AT&T, Intel, Microsoft, and Hewlett-Packard. The article mentionsthat Warren Buffett, chairman of Berkshire Hathaway, criticized firms that engaged in share repurchases.In a letter to shareholders, Buffett noted that share repurchases made sense during the mid-1970s, whenmany stocks traded below their intrinsic value. However, he argued that conditions changed during thebull market of the 1990s, even though share repurchases had become much more frequent. He alsosuggested that the motivation for share repurchases had also changed, and that during the 1990s firmsbought back their shares in order to pump up their stock prices.Discuss Warren Buffett’s views in the context of the chapter text.