Firman v_aluaatio Flashcards

1
Q

Can you name the 4 valuation approaches?

A
  1. Present value
  2. Relative valuation (= price multiples)
  3. The asset based approach
  4. Contingent claim valuation
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2
Q

Mitä Present value -valuation approach sisältää esimerkiksi?

ei tarvii varmaan muistaa ulkoo

A
  1. Enterprise value (EV)
  2. Equity value
  3. Discounted cash flow (to firm) model
  4. Discounted cash flow (to equity) model
  5. Economic value added model
  6. Residual income model
  7. Adjusted present value model
  8. Dividend discount model
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3
Q

Mitä Relative valuation (multiples) -valuation approach sisältää esimerkiksi?

(ei tarvii varmaan muistaa ulkoo)

A
  1. Enterprise value (EV)
  2. Equity value
  3. EV/IC
  4. EV/NOPAT
  5. P/B
  6. P/E
  7. EV/EBIT
  8. EV/EBITDA
  9. EV/revenue
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4
Q

Mitä The asset based approach -valuation approach sisältää esimerkiksi?

(ei tarvii varmaan muistaa ulkoo)

A
  1. Net asset value (NAV) approach
  2. Sum-of-the-parts approach
  3. Liquidation approach
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5
Q

What are the steps of valuation process?

A
  1. Business analysis
  2. Financial statement analysis
  3. Forecasting
  4. Valuation
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6
Q

Forecasting in the valuation process.

A

We make assumptions of the future: future cash flows, sales, balance sheet items.

So, future financial statements are projected.

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7
Q

What are the different methods used in Forecast assumptions?

A

Methods of predicting financial information can be classified as follows:

MECHANICAL:
1) Statistical models (UNIVARIATE) 2) Statistical models (MULTIVARIATE)

NON-MECHANICAL:
3) Trend analysis (UNIVARIATE) 4) Security analyst approach (MULTIVARIATE)

Different methods are based on different forecasting tools and data sources.

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8
Q

How do you select from the different methods used in Forecast assumptions?

A

Data availability and the purpose for which the predictions are made affect the selection of different prediction methods.

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9
Q

Mechanical prediction methods

A

Mechanical prediction methods include:

1) Univariate statistical models that are based on the analysis of the time-series of a single financial variable
2) Multivariate statistical models that are based on the analysis of the time-series of multiple financial variables

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10
Q

How are Mechanical prediction methods used?

A

In mechanical methods, predictions of the financial variable are mechanically driven from the data by applying a specified statistical model:

  • Statistical model is applied to the past data to estimate the model parameters
  • The estimated paremeters are then applied to current data to predict the future value of the variable
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11
Q

Example of a mechanical univariate statistical model is a model that forecasts earnings!

A

Example of a mechanical univariate statistical model is a model that forecasts earnings (X) to be an equally weighted average of the past four year’s earnings.

This approach assumes that future earnings can be simply predicted from the time-series of past earnings.

Ei oo mitenkään erityisen hyvä metodi. Toimii enemmän yleisluontoisena mallina toimialan tarkasteluun, eikä company specific.

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12
Q

Tell me about Non-mechanical prediction methods?

A

In non-mechanical prediction approach, an analyst incorporates a judgemental factor of her own into the analysis

This factor may reflect an ever-changing mix of economic inputs

A typical example of univariate non-mechanical approach is ’free-hand’ extrapolation of a time-series plot of earnings referred to as a trend analysis

Analysts’ earnings forecasts are a typical example of a multivariate non-mechanical prediction method
-> Analysts use many quantitative and qualitative information sources including financial reports of the firm, macro-economic forecasts, company visits etc.

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13
Q

Can you tell me about Analysts’ earnings forecasts?

A

Analysts’ earnings forecasts are frequently used to assess the future performance of the firm

Consensus earnings forecasts refer to the means or medians of the analysts’ earnings forecasts
-> Consensus earnings forecasts are probably the most important piece of financial information, at least for the valuation purposes

Range of the earnings forecasts of individual analysts measure the uncertainty in the analysts’ opinions regarding the value of the upcoming earnings

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14
Q

Companies Routinely Steer Analysts to Deliver Earnings Surprises

A

With nudges and phone calls, analysts are urged to lower their estimates, making it easier for companies to beat them; ‘a rigged race,’” says Barry Diller.

An analysis by The Wall Street Journal found that earnings estimates often decline steadily after the end of a quarter. That can turn what might have been an embarrassing “miss” for the company into a positive surprise.

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15
Q

Accuracy of analysts’ earnings forecasts and time before the earnings announcement?

A

Earnings announcement date affects the Accurace of analysts’ earnings forecasts:

Mitä kauempana ollaan siitä julkaisupäivästä, sitä huonompia kaikkien arviot.
Mutta mitä lähemmäksi sitä tulevaa julkaisupäivää mennään, sitä pienempi hajonta eri analyytikoiden arvauksille tulee ja sitä lähempänä ne on totuutta!

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16
Q

We derive abnormal earnings model from what model?

A

Deriving abnormal earnings model is done from the dividend discount model.

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17
Q

What is same in the abnormal earnings model as in the DDM and DCF models…

A

Principle in the abnormal earnings model is the same as in the DDM and DCF models…

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18
Q

What is Abnormal earnings model?

A

The abnormal earnings valuation technique evaluates a company’s worth based on two factors, i.e., the book value of the company and its expected earnings. The valuation model looks at the expected profit that can be generated by the management.

If the earnings are higher than expected, an investor would be willing to pay more than the book value.

19
Q

Tell more about Abnormal earnings model?

A

One assumption = Clean Surplus Relation

Definition of ROE as current Net Income over last period’s book value of equity

Definition of abnormal earnings as the difference between:

  • > Net Income and cost of equity (in $ terms), or equivalently,
  • > ROE and r_E, multiplied by last period’s book value of equity (in % terms)

A firms creates value when ROE > rE

20
Q

What does Firm valuation mean?

A

The term firm valuation refers to determining the true or intrinsic value of the firm.

This value may significantly differ from the asset-based book value of the firm.

21
Q

Why do investors and financial analysts conduct firm valuations?

A

Investors and financial analysts conduct firm valuation for various purposes needed in their decision making:

A) Investment decisions
B) In M&A transactions and IPOs, firm valuation plays a key role

22
Q

How do valuation models help firms?

A

From firms’ point of view, valuation models help understanding the key value drivers of the firm.

23
Q

What is Business analysis in the valuation process?

A

Business analysis

  • internal and external
  • ELI industry, competitors, products etc.
  • Business analysis is used to adjust the forecasts
24
Q

What is Financial statement analysis in the valuation process?

A

Financial statement analysis

- we use the published Financial statements to analyse profitability, leverage, growth etc

25
Q

What is Valuation step in the valuation process?

A
  • we use Valuation models
  • and Relative valuation

To get: What is the value of the equity of the firm?

26
Q

Can you name the Two different types of valuation tools that are mainly used?

A

Two different types of valuation tools are mainly used:

1) Relative valuation based on price multiples
- P/E-, P/B-, EV/EBIT- etc. ratios

2) Valuation models
- Dividend discount model (DDM)
- Free cash flow model (DCF)
- Abnormal earnings model (AE)

27
Q

Relative valuation vs. valuation models as a valuation tools?

A

Relative valuation is a simple valuation tool.

Valuation models are more sophisticated:

  • Infinite forecast horizon
  • Risk and time-value of money are taken into account
28
Q

What are Price multiples?

A

Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio of another, in order to make different companies more comparable.

These ratios, also called as price multiples, are used in relative valuation to determine the intrinsic value of the firm.

Price multiples can be defined in numerous ways.

29
Q

In Section 2, WHY did we calculate P/E- and P/B-ratios from per-share numbers?

A

In Section 2, we calculated P/E- and P/B-ratios from per-share numbers to:

  • Show the link between accounting numbers and stock prices
  • Calculate the expected return of a stock
30
Q

Relative valuation can answer what question?

A

Relative valuation can answer the question

“I want to buy a stock in a brewing industry, which one should I buy?”

31
Q

Relative valuation: what does it mean?

A

The value of the firm (a target firm) is estimated by looking at how the market prices similar or comparable firms

The value of the firm is whatever the market is willing to pay for it given its financial characteristics like earnings, book equity or sales

32
Q

Relative valuation: what information is needed?

A

Information needed

  • A group of similar or comparable firms
  • Median value of the price multiples of similar or comparable firms
  • Typically, price multiples like P/E- or P/B-ratio are used
33
Q

Relative valuation: how to do it?

A
  1. Identify comparable firms that have similar operations to the firm whose value you are calculating
    - > Operate in the same industry or otherwise have similar business models
  2. Calculate price multiples for the comparable firms by using their financial statement numbers and current stock price
    - > Earnings, book value, sales
  3. Apply these multiples to the corresponding measures for the target to get its intrinsic value
    - > Example: P(target) = EPS(target) × P/E(comps)
34
Q

Example on relative valuation

A

Suppose we have identified 5 firms which are similar to the firm we want to evaluate:

  • Firm A: P/E –ratio = 16
  • Firm B: P/E –ratio = 18
  • Firm C: P/E –ratio = 12
  • Firm D: P/E –ratio = 14
  • Firm E: P/E –ratio = 20
  • The median P/E –ratio is 16
  • Our firm has EPS of 5.00€

Implied stock price of our firm is 5.00€ × 16 = 80€

35
Q

Relative valuation: some considerations

A

Use financial statement numbers consistently when calculating price multiples

  • Use exactly the same financial statement numbers for target firm and for all comparable firms
  • For example, the same earnings numbers must be used for all firms when calculating P/E ratio
  • What if accounting methods are different for comps and target?
  • What about negative denominators?

Conceptual problem: circular reasoning
- Firm value is calculated from the market values of the comps

36
Q

Many ways to calculate P/E-ratios.

A

There are a number of variants on the P/E-ratio based upon how the price and the earnings are defined

Price:
- Usually the current price (though some like to use average price over last 6 months or year)

EPS:

  • EPS in most recent fiscal year (current)
  • EPS in most recent four quarters (trailing)
  • EPS expected in next fiscal year or next four quarters (both called forward)
  • EPS in some future year
  • EPS in many past fiscal years
  • Some combination of all these…
37
Q

What are the links between P/E, P/B and ROE?

A

P/B ratio increases with ROE
-> P/B as such is not indicative of the firm value without considering ROE

P/E ratio is the ratio of P/B ratio to ROE
-> P/E ratio indicates the current valuation of the firm relative to its profitability

Value of the firm having high ROE should be higher than that of the firm having low ROE

  • > Simple investment strategy
    a) Buy firms having low P/B ratios and high ROE
    b) Sell firms having high P/B ratios and low ROE
38
Q

Some empirical evidence from Helsinki Stock Exchange:

a) P/B vs. ROE calculated by using analysts’ EPS forecasts
b) P/B vs. ROE calculated by using EPS from previous year

What can you learn from these two graphs?

A

a) P/B vs. ROE calculated by using analysts’ EPS forecasts

  • Opettaja ei päivitä tuota taulukkoa enää, koska firmat muuttuu ja pisteet vähän, mutta yleinen tulos ei muutu!
  • When ROE goes up, the P/B goes up too -> There is a clear positive trend! Pisteet on regressioviivan lähellä lähinnä.
  • Tässä ne yritykset on paljon kauempana regressioviivasta, eli hajaantumeenpia! MIKSI? Past earnings are not related to P/B ratios as forecasted earnings.

ELI –> Value of the firm is based on the future expectations of the firm! So future earnings are related to stock prices, NOT past earnings!

39
Q

Denumerator of the price multiple can be based on what?

A

Denumerator of the price multiple can be based on:

Earnings:

  • Price/Earnings Ratio (PE) and its variants (PEG)
  • Enterprise value/EBIT
  • Enterprise value/EBITDA
  • Enterprise value/Cash Flow

Book value of the asset

  • Price/Book Value (of Equity) (PB)
  • Value/ Book Value of Assets
  • Value/Replacement Cost (Tobin’s Q)

Revenues generated by the asset

  • Price/Sales per Share (PS)
  • Value/Sales

Asset or industry specific variables (Price/kwh, Price per ton of steel ….)

40
Q

How do you calculate EV/EBIT-ratio (and its parts)?

A

EV/EBIT = Enterprise value (EV) / Earnings before interest and taxes (EBIT)

Enterprise value (EV) = Market value of equity + Net interest-bearing debt

Net interest-bearing debt = Interest bearing debt - Financial assets

41
Q

How do you calculate Price-Sales Ratio (P/S)?

A

P/S
= Stock price / Sales per share
= Market value of equity / Sales

42
Q

What are the deficiencies of P/S ratio?

A

P/S ratio is commonly used despite its deficiencies:

  • By relying on sales, it neglects all the costs need to generate sales
  • Firm having a high level of sales can be deeply unprofitable
43
Q

Good things to know about relative valuation?

A

Selection of the group of comparable firms is essential in relative valuation!

Relative valuation can give very strange results!