American History

A somewhat more complicated alternative is the dividend valuation model. This values a company using its projected dividends. Dividends flow to the stockholders and therefore the discounted value of future dividends should be the stock price for the company. However, this requires us to forecast future dividends. Dividends are paid out of earnings, which involve sales revenues and costs. Future dividends also involve payout policies (i.e. what proportion of earnings go to stockholders).
Therefore, a more basic (and more elegant) valuation model uses the operating cash flows of the company available to the stockholders and compares it to the invested capital in the company using appropriate discount rates. The capital budgeting process is very relevant to managerial decision-making and a valuation model using operating cash flows allow explicit consideration of various managerial strategies. Computation of a firm's value in this manner also allows us to explicitly understand what drives this value and how this value can be changed.
Analyzing historical performance is important ingredient to understanding the future performance of the company. The publicly available information on the company is the starting point. These are the annual reports, filings with the SEC such as the 10-K, 10-Q and 8-K. The historical financial information should be integrated with the non-financial information about the company. This is important in understanding the company's business. Computation of key financial ratios and comparison of the company with the industry average and its competitors are other components of this understanding.
The cash flow available to stockholders should be computed in accordance with the class lectures. You should start with the earnings before interest and taxes, EBIT, and adjust it for the non-cash items to get the operating cash flow. Although you should look at the statement of cash flows, beware that the accounting definition of operating cash flow...