2. Equity valuation

Question 1

Discount dividend

Gordon Growth Model (GGM) Equity Risk premium?

Answer 1

ERP = Dividend yield + g long-term earning - bond yield long term

Question 2

Ibbotson-Chen equity

Answer 2

ERP = (1 + i) x (1 + g EPS) x (1 + g PE) - 1 + expected yield - Rf

Question 3

Models of Required Equity Return

1. CAPM
2. Fama French
3. Pastor-Stambough model
4. Macroeconomic multifactor model
5. Build up model

Answer 3

1. R = Rf + beta x ERP
2. R = Rf + beta1x(Rm - Rf) + beta2x(Rs-Rb) + beta3x(Rl - Rh)
3. Add liquidity premium in to Fama French
4. Macro factors that effect CF or discount factor
5. R + ERP + Size premium + Specific premium

Question 4

Adjusted Beta

Answer 4

Beta = 2/3 * regression beta + 1/3 x 1

Question 5

Discount dividend

1. constant dividend growth rate
2. perpeptual growth rate
3. stock’s expected rate of return

Answer 5

1. V0 = D0 x (1 + g)/(r-g) = D1/(r-g)
2. V0 = D/r
3. r = D1/P0 + g

Question 6

Discount dividend

1. Present value of growth opportunity

Answer 6

V0 = current value + present value of growth
= EPS1/r + PVGO

Question 7

Discount dividend

1. Leading PE ratio
2. Trailing PE ratio

Answer 7

1. P0/E1 = D1/(r-g) x 1/E1 = [1-b]/[r-g]
2. P0/E0 = D1/(r-g) x 1/E0 = [(1-b)x(1+g)]/[r-g]

b: retention ratio

Question 8

Discount dividend

H-model value

Answer 8

V0 = [D0 x (1+gL) + D0 x H x (gS - gL)] / (r-gL)

H = T/2

Question 8

Discount dividend

Two-stage dividend discount model

Answer 8

V0 = total sum [D0 x (1+g)^t / (1+r)^t] + [D0 x (1+g)^t x (1+gL) / [(1+r)^t x (r-gL)]

Question 8

Discount dividend

Substainable growth rate

Answer 8

1. g = b * ROE
2. g = [NI - D]/Equity