18: Equity Valuation Models Flashcards
Book Value Definition
An accounting measure describing the net worth of common equity according to a firm’s balance sheet.
Liquidation Value Definition
The net amount that could be realized by selling the assets of a firms after paying its debt.
Replacement Cost Definition
The cost to replace a firm’s assers. Also known as the reproduction cost.
Tobin’s q Definition
The ratio of the market value of a firm’s assets to its replacement cost.
Market Capitalization Rate Definition
k
The market consensus estimate of the appropriate discount rate for a firm’s cash flows.
Dividend Discount Model (DDM) Definition
A formula stating the intrinsic value of a firm is the present value of all expected future dividends.
V = SUM(PV(dividends))
Constant Growth DDM Definition
A form of the DDM that assumes dividends will grow at a constant rate.
V = D/(k-g)
Plowback Ratio Definition
The proportion of a firm’s earnings that are re-invested into the business.
Plowback Ratio = 1 - Dividend Payout Ratio
Dividend Payout Ratio Definition
The percentage of a firm’s earnings that are distributed as dividends.
Present Value of Growth Opportunities (PVGO) Definition
The net present value of a firm’s future investments.
Two-Stage DDM Definition
A DDM that allows for an initial high-growth period before the firm settles to a sustainable growth level.
Price-Earnings Ratio Definition
The ratio of a stock’s price to its earnings per share.
Earnings Management Definition
The practice of using flexibility in account rules to improve apparent profitability of the firm.
What are the two approaches to firm valuation?
- Using book value (replacement cost or liquidation value), or,
- Present value of all expected future dividends per share.
What do dividend discount models estimate?
The intrinsic value of the stock.
