equity valuation Flashcards

1
Q

residual claimants

A

stockholders - the value of equity after using the assets to pay off all other claimants (liabilities)

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2
Q

how to value asset and liability

A

through book values

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3
Q

book value

A

the sum of the amounts of all the line items in the shareholders’ equity section on a company’s balance sheet

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4
Q

market value

A

the value of a firm as a going concern - seldom = to book values - based on observed share prices and number of outstanding shares, reflects a consensus of the market (all market participants) regarding dividend estimates , future prices, discount and growth rates

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5
Q

liquidation value

A

the net value of a company’s physical assets if it were to go out of business and the assets sold - better measure of market value

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6
Q

replacement cost

A

the value the business converges to - referring to the amount of money a business must currently spend to replace an essential asset like a real estate property, an investment security, a lien, or another item, with one of the same or higher value

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7
Q

Tobin’s Q

A

market price/replacement cost

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8
Q

intrinsic value

A

value from the perspective of specific investors depending on the information they have, reflects the outcome on fundamental analysis. V = PV(Div) + PV(selling price) @ risk adjusted ratee

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9
Q

value investing

A

finding business for which intrinsic value > market price

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10
Q

discounted free cash flow model - DCF

A

shareholders own a share of equity of the firm - value of equity is teh expected PV of all future cash earnings less all incurred liabilities

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11
Q

dividend discount model

A

value of a share of equity is equal to rpesent value of all future dividends

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12
Q

dividend payout ratio

A

d = expected portion of earnings that will be paid out as dividend, D = d x earnings

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13
Q

plowback/retention/reinvestment ratio

A

b = expected portion of earnings that are retained and reinvested,
Investment Inv = b x earnings

b+d = 1

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14
Q

ROE

A

return on reinvested earnings, cna be different frmo the required cost of caiptal

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15
Q

market capitalisation rate

A

market consensus of required rate of return - can be presented as the sum of dividend yield and capital gains rate

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16
Q

constant dividends

A

if dividends are constant then they should all be equal to the last dividend

17
Q

growing dividends

A

Gordon growth model

18
Q

growth opportunities

A

growth in earnings depends on plowback ratio, b and ROE g = b x ROE,
if b = 1 next few dividends = 0 but share price may still increase

for growth:
ROE>R
g < R

19
Q

PVGO present value of growth opportunities

A

P0 = no growth value per share + PVGO

20
Q

dividends throughout business life cycle

A

startups - most of the value placed on future growth opportunities
consolidation
mature business
decline

growth rates and dividend payout ratios change throughout business life cycle

21
Q

valuation ratios

A

Price - dividend ratio

price - earnings ratio - might reflect expected growth

price - book ratio (how aggressively the market values the firm)

price-sales ratio - for startups

22
Q

pitfalls of P/E analysis

A

earnings are an accounting result
depreciation and inventory use historical cost
inverse relation to inflation - earnings of lower quality in high inflation
can be easily manipulated (managed) too much discretion in rules.

relation to business cycle - fluctuation rather than smooth rise - P/E ratio moves in opposiet direction to deviation in earnings

difficulty in predicting earnings (forward P/E ratios)

23
Q

cyclically adjusted P/E model

A

adjusting the ratio to the different phases of the business cycle, divide stock price by an estimate of the sustainable long-term earnings (and not current earnings) –> average inflation adjusted earnings over an extended period (10 years)

24
Q

multiples valuation

A

intrinsic value of the company using P/E ratio as a benchmark Vi = Ei x P/E