Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business. Beta is a measure of a stock's volatility, compared to the market as a whole. In this calculation we've used 6.1%, which is based on a levered beta of 0.971. Given that we are looking at Rigel Pharmaceuticals as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt.
#Lord of rigel price full
The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Compared to the current share price of US$1.2, the company appears about fair value at a 13% discount to where the stock price trades currently. In the final step we divide the equity value by the number of shares outstanding. The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$246m. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.1%. In this case we have used the 5-year average of the 10-year government bond yield (1.9%) to estimate future growth. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth.
#Lord of rigel price free
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 10-year free cash flow (FCF) forecastĪfter calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. We do this to reflect that growth tends to slow more in the early years than it does in later years. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. To begin with, we have to get estimates of the next ten years of cash flows. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate.
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth.
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