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Hayden Ltd intends to make its first dividend payment 2 years(s) from now. It then intends to pay dividends annually thereafter. The company has announced it expects the first three dividends to all be of the magnitude of around 5 cents per share. Subsequent dividends will then be paid out at a set rate of 50% of earnings. Your earnings forecasts for this coming year suggest that $0.20 Earnings per Share (EPS) is the most likely outcome. You are then forecasting EPS growth of around 5% p.a. in perpetuity. What would be your valuation of Hayden Ltd's shares, given you require a 15% p.a. return?

Step 1—Forecast Expected Cash Flow: the first order of business is to forecast the expected cash flow for the company based on assumptions regarding the company's revenue growth rate, net operating profit margin, income tax rate, fixed investment requirement, and incremental working capital requirement. We describe these variables and how to estimate them in other screens.

Step 2—Estimate the Discount Rate: the next order of business is to estimate the company's weighted average cost of capital (WACC), which is the discount rate that's used in the valuation process.  We describe how to do this using easily observable inputs in other screens.

Step 3—Calculate the Value of the Corporation: the company's WACC is then used to discount the expected cash flows during the Excess Return Period to get the corporation's Cash Flow from Operations.  We also use the WACC to calculate the company's Residual Value. To that we add the value of Short-Term Assets on hand to get the Corporate Value.

Step 4—Calculate Intrinsic Stock Value: we then subtract the values of the company's liabilities—debt, preferred stock, and other short-term liabilities to get Value to Common Equity, divide that amount by the amount of stock outstanding to get the per share intrinsic stock value.

The purpose of the Discounted Cash Flow (DCF) valuation is to find the sum of the future cash flow of the...