Exam 3 - Chapter 13 [SLIDES] Flashcards
Fundamental analysis models
A company’s value by assessing its current and future probability
Fundamental analysis is to identify
Misprinted stocks relative to some measure of “true” value derived from financial data
True value is
Intrinsic value
Models of equity valuation
- use of financial statements
- dividend discounts model (DDM)
- Price/Earnings Ratios
- Free cash flow models
Valuation of MArket Comaprables and Financial Statemntsz to estimate firm value
How do they do this?
- Compare valuation ratios of firms to industry averages
- Ratios like price/sales are useful for valuing start-ups that have yet to generate positive earnings
- Book values are based on historical cost, not actual market values
Which one you use the book value or the market value when you are estimating?
Market value
Examples of Comparative Valeu
- Price-to-book ratio
- price to cash flow ratio
- price to sales ratio
Prices to book ratio used what value
Market value
Book value
Book value - balance sheet, etc
Price to cash flow ratio uses what type of value
Market value
Book value
Market value - uses the stock
The DDM says the stock price should equal
The present value of all expected future dividends
PV0=
Present value
Do =
Dividend at time t
K =
Market required rate of return.
Intrinsic value (IV)
Is the “true” value, according to a model with my own information
THe market values
(MV, or market price) is the consensus value of all market participants, (maybe, excluding me)
My trading signal
IV > MV Buy
IV < MV sell or Short sell
IV = MV Hold or Fairly Priced
The runner on a stock is composed of
Dividends and capital gains or losses
Whose expectations (Expected HPR)
My expected HPR may be more or less than the market required rebate of return in equilibrium
K is often called
Market capitalization rate !!!
IMPORTANT
If I believe that sick is priced correctly, k should equal to the ___
Expected return
Treading Signal
E(r) > K Buy
E(r) < k sell or short sell
E(r) = K hold or fairly priced
Constant growth DDM Implications
Assumptions:
- A stable dividend policy (constant retention) (plowback) rate, B) 2. Earn a stable return (ROE), r, on new equity investment (i) overtime
Implying the earnings grows at g =
R x B
Implying Ge= Gd =
R x B since the retention (plowback) rate is constant
G =
ROE x B `
Constant Growth model implies the
Price is expected to grow at the constant dividend growth rate of G
The constant growth rate DDM implies that that the value of stock will be higher for
- Larger expected dividend per share
- Lower market capitalization rate, k
- Higher expected growth rate of dividends
the stock price is expected to grow at the same rate as ______
Dividends
The value per share equals the value of the assets already in place, the _______
____ the NPV of its future investments
Which is called the _______ or ______
This is bold so understand it
No-growth value per share
Plus
Present value of growth opportunities or PVO
Price (PVo) =
No-growth value per share + PVGO
P/E rises dramatically with __
PVGO
High P/E indicates that the firm has ______ _______ _________
Ample growth opportunities
When PVGO = 0 , P0 = E1/k
-
High growth is a ____ stock
Pe (price earning)
HIGH _____ generates high PE ratio
PVGO
P/e increases: (2)
- as ROE increases
- As plowback increases, as long as ROE > k
Wall Street rule of thumb:
The growth rate is roughly equal to the P/E ratio
If the P/E ratio of Coca coal is 15, you’d expect the company to be growing at about ____ per year
15%
P/e deals with
Growth rate of the company
When risk is higher, k is high; therefore P/e is ____
Lower
K
Market rate of return
What do you use for P/E analysis
- use of accounting earnings
- inflation
- reported earning fluctuate around the business cycle
All different industry have different ___ Ratio
P/e
Free cash flow approach
- Value the firm by _______ free cash flow at WACC
Discounting
Free cash flow :
Whatever cashlofw corporation gives to creditor and shareholder
Operating cash flow will use to
- capital expenditures
- increase in net working capital
_______ is freee cash flow
Dividend
Another name for free cash flow for the firm
Often called cash flow from asset
Free cash flow goes to
Cash flow to creditors
+
Cash flow to shareholders
