Financial Valuation Flashcards
1
Q
Annuities
B6-63
A
a series of equal cash flows to be received over a number of periods
2
Q
Perpetuities
B6-64
A
when periodic cash flows paid by an annuity last forever
*assume div will never change
P=D/R
3
Q
Cost Growth Dividend Discount Model (DDM)
B6-64
A
- assume div grow at constant rate
- implies that stock price will grow at same rate as div
- assumes required rate of return > div growth rate
4
Q
Price Multiples
Price-Earnings (P/E) ratio
B6-66
A
- earnings is a key driver of investment value (stock price)
- changes in P/E are tied to long-run stock performance
5
Q
Pricing Multiples
PEG ratio
B6-67
A
shows effect of earnings growth on Co. P/E
- assumes linear relation between P/E and growth
- stocks w/ lower PEG ratio are more attractive
6
Q
Pricing Multiples
Price-to-Sale ratio
B6-68
A
- sales are less subject to manipulation than earnings or BV
- sales are always positive; can use when negative EPS
- ratio is not as volatile as P/E ratio
7
Q
Pricing Multiples
Price-to-Cash Flow ratio
B6-69
A
- cash flow is harder to manipulate than earnings
- it is more stable measure than P/E
- changes in Co. P/CF ratio over time positively related to changes in Co. L-T stock returns
8
Q
Pricing Multiples
Price-to-Book ratio
B6-69
A
- focuses on BS vs IS or SCF
- BV common equity is more stable w/ EPS
- P/BV is usually positive, can use when EPS is negative
- P/BV ratio can explain firm’s avg stock returns in long run
9
Q
Discounted Cash Flow Analysis
5 Steps
B6-71
A
- choose model
- forecast security CF using model
- select discount rate method (usually CAPM)
- estimate discount rate and apply to mode
- calculate equity security intrinsic (true) value and compare current mkt value
10
Q
Discounted Cash Flow Analysis (DCF)
3 types of DCF models
B6-71
A
- Dividend Discount Model (DDM)
- Free Cash Flow model
- Residual Income model
