corporate valuation Flashcards

1
Q

equity vs enterprise value

A
  • Just the value of the equity, it does not consider the value, which is added by debt
  • the sum of the value of equity and the debt is the value of the enterprise
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2
Q

Discounted Dividend Model

A
  • Basic idea: the value of a stock for an investor is all future dividend payment plus the price of the stock when selling it
  • because these payments are in the future we have to discount them x/(1+r)t
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3
Q

Gordon Growth Model

A
  • Special version of the DDM
  • It assumes that the dividends are growing with a constant growth-rate g (g < r)
  • It implies a constant growth rate for infinity or a long period of time

only works with very stable companies, like monopolies for utilities

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4
Q

Estimating growth rates

A

g = ROE * plowback ratio

ROE = Earnings per Share/ Book Value per Share

Plowback ratio = 1 - Dividends/EPS

Not paid dividends are reinvested into the company and therefore impact the Growth rate. The GGM is very useful but also very much simplified

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5
Q

Present Value of Growth Opportunity

A
  • a firm gives out all dividends => no growth of the dividends
    • we can calculate the PV of the company in this scenario with no growth
  • a firm holds back a part of their dividends =>growth of the dividends (ROE > r)
    • we can calculate the PV of the company in this scenario with growth
  • If the ROE > r the PV of the company with growth will be higher
  • the difference between these values are is called Present Value of Growth Opportunity (PVGO)

PV2 - PV1 = PVGO

  • PVGO is the NPV of a company’s future investments
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6
Q

Dividends

payout ratio

payout policy

dividend policy

A
  • payout ratio is the proportion of income that is paid out to shareholders
    • payout ratio = 1 - plowback ratio
    • high payout ratio => high dividend yield today but lower dividend yield in the future
    • vice versa
  • payout policy answers to different questions
    • how much cash should the company payout to its shareholders?
    • what kind of dividend policy should be used? cash dividends or repurchasing stocks?
      • repurchasing stocks means increases the stock value and is a singular action with no commitments in the future
      • Cash dividends do not affect the stock price at that moment, but the capital markets think, that the company can pay these dividends every year from now on
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7
Q

Limitations of a dividend-based valuation

A

very intuitive and straightforward, BUT…

  • Young and high growth firm often do not pay dividends
  • The number of dividend payment decreased over the last years
  • stock buyback programs are double the value of stock dividends in the USA in 2007
  • That’s why a focus on dividends only isn’t complex enough
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8
Q

Augmented Dividend

A

augmented dividend = dividends + stock buybacks

but there are still problems:

  • stock buybacks often spike in contrast to dividends => no signaling effect, therefore we have to use an average over a period of time
  • the is an implicit assumption in the concept of augmented dividends -> managers pay out excessive cash to the shareholders, that’s not true, many companies build huge cash reserves in their balances
  • some companies don’t pay augmented dividends at all

we need a better solution

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9
Q

Discounted Cash Flow (DCF) Model

A

Instead of dividends, free cash flows (FCF) can be used to value a company, too.

FCFs are the difference between cash revenue and cash expenses. Transactions, which do change liquidity, are not considered.

Calculation of FCF:

EBIT

-Taxes on EBIT

=NOPAT

  • /+ noncash transactions like depreciation, deduction on non-cash value gains
  • CAPEX capital expenditures
  • deltaWC change in non-cash working capital

=

FCF

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10
Q

Calculating the PV via DCF

A
  • Discounting all assumed FCF in the next until the last our last assumption
  • This last assumption is called H => horizon value
  • from there on we will add a constant growth rate (g) to H and discount them accordingly to their years
  • add everything up
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11
Q

Advantages of the DCF method

A
  • considers the cash flows generated in one year
  • different countries have different accounting standards, therefore the profit varies a lot but not the cashflow therefore it’s universal
  • It is independent of dividend payments, there are just individual decisions of the management and don’t have to refect the value of the company
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12
Q

pitfalls of the DCF method

A
  • Transparancy: which level of CAPEX has been chosen and why? => often made with assumptions
  • Are the FCF forecasts realistic?
    • Are the rate of growth and the future cost right?
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13
Q

multiple valuations

A
  • often more informative to compare the relative value of different firms
    • market expectations can be included in the valuation
  • Procedure
  1. determine the peer group
  2. choose one or several financial ratios
  3. calculate the ratios for the peer group and the compared company
  4. calculate the mean or media of the peer group to compare it
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14
Q

primary use cases for multiple valuation

A

Equity valuation

  • often used as a second or additional valuation method
  • sometimes used as a primary method or non-public companies (IPO)

Investor’s decision

  • a primary decision tool for style investment
  • frequently used for stock screening
  • the aggregate of these valuations can be used to measure the market valuation and investors sentiment
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15
Q

Price-Earnings multiple

A

Gives us an idea of how many times we have to pay the earning when we

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16
Q

Earnings Yield (EY) or Earnings-Price multiple

A
17
Q

Dividend Yield (D/P)

A
18
Q

Market to Book Ratio

A
19
Q

Price Sales Ratio

A

relates to the shares price to sales of the company

20
Q

Enterprise Value - EV/EBITDA

A
21
Q

Pros and Cons of multiple valuations

A

Pro:

  • few assumptions in contrast to DCF or DDM
  • easy to calculate
  • reflect the current market mood, if there is a crisis all companies are affected, therefore the valuation method still works
  • allows easy comparison (no dividend, non-public companies)

Con

  • neglect risk
  • is limited in forward-looking => e.g. dividend yield only takes the present and past into account
  • Bubble effect
  • lack of transparency
    • who is in the peer group
    • choice of multiple
    • calculation of the multiple