Equity Valuation: Applications and Processes Flashcards
When is “Sum-of-parts valuation” used?
Sum-of-parts analysis is frequently used to evaluate the value that might be unlocked in a restrucutring through a spin-off, split-off, tracking stock or a equity IPO (Carve out)
Explain Sum-of-Parts Valuation
Break-up or Private market value.
The estimated value of a company is the sum of the estimated values of various businesses within the company.
Requiers a detailed breakdown of each segment contribution to earnings and Cash flow.
Considered as independent and going concern.
Useful when valuaing a comany with segments in different industries that have different valuation characteristics.
Characteristics of Growth phase
- 3 stage DDM
- Rapidly Expanding Markets
- High profit Margins
- Abnormally high growth in EPS
- DPR = 0
- FCFF < 0
- ROE > RR
Characteristics of Transition phase
- Earnings growth slows closer to GDP growth
- Competition puts pressure on prices and margins
- CAPEX Requierments decline
- FCF & DPR > 0
- ROE approaches RR
Characteristics of Maturity Phase
- Investment oppertunity earn cost of capital
- ROE Almost equals RR
- Earnings and DPR Stablize at long term level
Explain cost leadership strategy
Under cost leadership, the company is the lowest cost producer, while offering products comparable to those of other companies so that products can be priced at or near the industry average.
What is an Asset-Based Valuation model
Asset-Based valuation model values a company on the basis of the market vaue of the assets or resources it controls.
What is an Absolute Valuation model
Absolute valuation model is a model that specifies an assets intrinsic value.
These models are used to produce an estimate of value that can be compared with the asset’s market price.
The most important type of absolute equity valuation model are present value models.
What is the conglomerate discount?
Difference between sum of parts and the market value.
