Chapter 7: Corporate Valuation and Stock Valuation Flashcards
“Sell-side” analysts
security analysts that work for investment banks and brokerages
reports distributed to investors
“Buy-side” analyst
work for mutual funds, hedge funds, pension funds, and other institutional investors
analyst primary objective
to predict corporate earnings, dividends, and free-cash flow (and thus, stock prices)
Value of operations
(also intrinsic value)
present value of expected free cash flows discounted by weighted average cost of capital
stock value calculation
in some circumstances can be done by discounting the dividends (expected cash flow to stockholders) at rate of return required by stockholders
widely- used valuation models
Free-cash-flow model
dividend growth model
legal rights and privileges of common stock holders
- right to elect directors (who elect management)
- Preemptive right (right to maintain proportionate share if new shares are issued)
cumulative voting
common stockholders get 1 vote per share. in cumulative voting stockholders get 1 vote per share per position and can cast them all to a single candidate if desired (increases minority control)
proxy fight
an attempt to take over a company in which an outside group solicits existing shareholder’s proxies (authorizations to vote shares in a meeting) in an effort to overthrown management and take control of the business
Purpose of preemptive right
allows current stockholders to maintain control
prevents transfer of wealth from current stockholder to new stockholders (say if corp issued new shares at a low price and took control that way)
Classified stock
stock with different rights (determined by classification) to meet special needs and circumstances
if only two classes: dual class shares
rights specified may include rights to dividends and voting rights
voting stock typically sells higher than nonvoting stock
different share classes becoming less common
founder’s shares
classified stock restricted to ownership by the firm’s founders, usually has sole voting rights but restricted dividends (for a specified number of years)
tracking stock
aka target stock
classes of stock with dividends tied to a particular part of the company. an attempt to allow separate valuations for separate divisions
not very popular anymore
stock prices on ticker
during trading hours may be current ask or bid quote. otherwise reported price is last price at which stock traded (closing price)
may show % change from previous day’s price
ttm
trailing twelve months
Free cash flow valuation model
defines the total value of a company as the present value of its expected free cash flows discounted at the weighted average cost of capital (value of operations) plus the value of non-operating assets
since managerial choices affect free cash flows and risk they can be judged by how the affect the model
entity value
total value of a company
Primary sources of entity value
value of operations (free cash flow discounted at weighted average cost of capital) can be influenced by the company
value of non-operating assets (financial assets: short term + long term investments) determined by market forces
Claims on entity value
debt: 1st claim
preferred stock: 2nd claim
common stock: residual claim
perpetuity
a constant and equal cash flow stream
present value of a perpetuity
Free cash flow / weighted average cost of capital
total intrinsic value
= value of operations (FCF/WACC) + short term investments
entity valuation model
estimates the total value of a corporation rather than just the values of its debt and stock
intrinsic value of equity
remaining value after subtracting the claims of debtholders and preferred stockholders
= total intrinsic value - all debt - preferred stock