Equity Flashcards
Fair (Market) Value
Fair (Market) Value – price at which an asset/liability would change hands
Investment Value
Investment Value – value to a specific buyer, taking account of potential synergies
Sum-of-Parts Valuation
Sum-of-Parts Valuation – a valuation that sums the estimated values of each of a company’s business as if each business were an independent going concern
GGM Equity Risk Premium Estimate =
GGM Equity Risk Premium Estimate = dividend yield on the index based on year-ahead aggregate forecasted dividends and aggregate market value + consensus long-term earnings growth rate – current long-term government bond yield
(Macroeconomic Model; Ibbotson-Chen Model) Equity Risk Premium =
(Macroeconomic Model; Ibbotson-Chen Model) Equity Risk Premium = {[(1 + EINFL)(1 + EGREPS)(1 + EGPE) – 1.0] + EINC} – Expected Risk-Free Rate = {[(1 + Expected Inflation)(1 + Expected Growth Rate in Real EPS)(1 + Expected Growth Rate in P/E) – 1.0] + Expected Dividend Yield or Expected Income Portion} – Expected Risk-Free Rate
CAPM (doesn’t ___, not best for ___)
CAPM (doesn’t capture company specific risk, not best for individual securities) ri = E(rf) + B(Equity risk premium)
Fama French Model
Fama French Model: r_i= r_f+β_i^mkt RMRF+ β_i^Size SMB+β_i^value HML , where RMRF: RM – RF, SMB: small minus big [market cap], HML: high minus low [book to market]
Pastor-Stambaugh Model (PSM)
Pastor-Stambaugh Model (PSM) – extension to FFM adds liquidity factor
Unlevered/Relevered Beta
Unlevered/Relevered Beta: β_U=[1/(1+D/E)] β_E , β_E^’= [1+D^’/E’] β_U
WACC
WACC = MVD/(MVD+MVCE)rd(1-T) + MVCE/(MVD+MVCE)r
5 Forces
5 Forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, rivalry among existing competitors
The Right Strategic Style for your Environment
The Right Strategic Style for your Environment - Adaptive: unpredictable industry, can’t change it; Shaping: unpredictable industry, can change it; Classical: predictable industry, can’t change it; Visionary: predictable industry, can change it
Top-down approaches …
Top-down approaches begin at the level of the overall economy, bottom-up approaches begin at the level of the individual company, and hybrid approaches include elements of top-down and bottom-up approaches
Return on Capital Employed (ROCE)
Return on Capital Employed (ROCE) is a pre-tax return measure that can be useful in the peer comparison of companies in countries with different tax structures
A discounted dividend approach is most suitable for …
A discounted dividend approach is most suitable for dividend-paying stocks I which the company has a discernable dividend policy that has an understandable relationship to the company’s profitability
Gordon Growth Model: Vo=
Gordon Growth Model: V_0=(D_0 (1+g))/(r-g) or V_0=D_1/(r-g) , where g = b*ROE, ROE = NI / SH/E
Present Value of Growth Opportunities
Present Value of Growth Opportunities: V_0=E_1/r+PVGO , r from CAPM
Leading P/E
Leading P/E: P_0/E_1 =(D_1⁄E_1 )/(r-g)=(1-b)/(r-g)
Trailing P/E
Trailing P/E: P_0/E_0 =((D_0 (1+g))⁄E_0 )/(r-g)=((1-b)(1+g))/(r-g)
dividend payout ratio = 1 – b; D0 = (1-b)EPS
Preferred Stock: Vo =
Preferred Stock: V_0=D/r
Two-stage DDM: Vo =
Two-stage DDM: V_0=∑_(t=1)^n▒〖(D_0 〖(1+g_s)〗^t)/〖(1+r)〗^t +(D_0 (1+g_s )^n (1+g_L))/((1+r)^n (r-g_L))〗
The H-model assumes that …
The H-model assumes that the dividend growth rate decline linearly from a high supernormal rate to the normal growth rate during Stage 1: V_0=(D_0 (1+g_L )+D_0 H(g_S-g_L))/(r-g_L ) , where H – half life in years of the high growth period
Sustainable growth rate
Sustainable growth rate: g = b * ROE, b = retention ratio
Compound Annual Growth Rate in Dividends
Compound Annual Growth Rate in Dividends: g= (〖EPS〗_tx/〖EPS〗_ty )^(1/(x-y))-1
Free cash flow approach might be appropriate when …
Free cash flow approach might be appropriate when the investor takes a control perspective
FCFF is preferred over FCFE when …
FCFF is preferred over FCFE when a company is leveraged and expecting a change in capital structure
Firm Value (FCFF) =
Firm Value = 〖FCFF〗_1/(WACC-g) ; Equity = FV – Debt
Equity Value (FCFE) =
Equity Value = 〖FCFE〗_1/(r-g)
FCFF (NI) =
FCFF = NI + NCC + Int(1-T) – FCInv – WCInv = net income + net noncash charges (depreciation) + interest expense * (1 – Tax Rate) – Investment in fixed capital – investment in working capital
FCFE (NI) =
FCFE = NI + NCC – FCInv – WCInv + Net Borrowing
FCFE (FCFF) =
FCFE = FCFF – Int(1-T) + Net Borrowing
FCFE (CFO) =
FCFE = CFO – FCInc + Net Borrowing
FCFF (EBITDA) =
FCFF = EBITDA(1-T) + Dep.(T) – FCInv – WCInv
FCFE (DR) =
FCFE = NI – (1-DR)(FCInv – Dep.) – (1-DR)(WCInv) , where DR – target debt ratio
Single-Stage Model (FCFE): Vo =
Single-Stage Model: V_0=(〖FCFE〗_0 (1+g_real))/(r_real-g_real )
Justified P/B
Justified P/B: P_0/B_0 =(ROE-g)/(r-g) ; g=b*ROE
Justified P/S
Justified P/S: P_0/S_0 =(〖(E〗_0⁄(S_0)(1-b)(1+g)))/(r-g) ; E/S = profit margin, g = long-run earnings growth rate
PEG is calculated as …
PEG is calculated as the ratio of the P/E to the consensus growth forecast
Enterprise Value
Enterprise Value: EV = E + D – Cash & ST Investments; EV = EBITDA * EV/EBITDA multiple; EBITDA = net income + interest + tax + depreciation + amortization
Enterprise Value: EV = MV of Common Equity + MV of Debt + Non-Controlling Interest – Cash and Investments
EBITDA overestimates …
EBITDA overestimates CFO if working capital is growing
Residual Income
Residual Income: RI = Net Income – Equity * rE , where Equity * rE is the ‘equity charge’
Economic Value Added
Economic Value Added Economic Profit = NOPAT - $WACC
Multistage Residual Income Model: Vo =
Multistage Residual Income Model: V_0= B_0+ ∑(t=1)^T▒〖(E_t-rB(t-1))/〖(1+r)〗^t +(P_T-B_T)/〖(1+r)〗^T 〗 , P-B = premium over book value
Single-Stage Residual Income Model: Vo =
Single-Stage Residual Income Model: V_0=B_0+(ROE-r)/(r-g) B_0 where B0 – book value per common share, r – cost of equity, g – long-term dividend growth rate
Intrinsic Value
Intrinsic Value – the value obtained if an option is exercised based on current conditions
Excess Earnings Method
Excess Earnings Method (EEM): an income approach that estimates the value of all intangible assets of the business by capitalizing future earnings in excess of the estimated return requirements associated with working capital and fixed assets
Discounts for lack of control
Discounts for lack of control, DLOC = 1 – [1 / (1 + Control Premium)]
