equity valuation Flashcards
residual claimants
stockholders - the value of equity after using the assets to pay off all other claimants (liabilities)
how to value asset and liability
through book values
book value
the sum of the amounts of all the line items in the shareholders’ equity section on a company’s balance sheet
market value
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
liquidation value
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
replacement cost
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
Tobin’s Q
market price/replacement cost
intrinsic value
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
value investing
finding business for which intrinsic value > market price
discounted free cash flow model - DCF
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
dividend discount model
value of a share of equity is equal to rpesent value of all future dividends
dividend payout ratio
d = expected portion of earnings that will be paid out as dividend, D = d x earnings
plowback/retention/reinvestment ratio
b = expected portion of earnings that are retained and reinvested,
Investment Inv = b x earnings
b+d = 1
ROE
return on reinvested earnings, cna be different frmo the required cost of caiptal
market capitalisation rate
market consensus of required rate of return - can be presented as the sum of dividend yield and capital gains rate
constant dividends
if dividends are constant then they should all be equal to the last dividend
growing dividends
Gordon growth model
growth opportunities
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
PVGO present value of growth opportunities
P0 = no growth value per share + PVGO
dividends throughout business life cycle
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
valuation ratios
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
pitfalls of P/E analysis
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)
cyclically adjusted P/E model
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)
multiples valuation
intrinsic value of the company using P/E ratio as a benchmark Vi = Ei x P/E
