LM 8: Equity Valuation: Concepts & Basic Tools Flashcards
What is the difference between market value and intrinsic value?
market value determined by market quotes and transactions
intrinsic value objective true value investors would get if they had all relevant quantitative and qualitative information
Will the intrinsic value be less than the market value or more than the market value for undervalued and overvalued securities?
undervalued = intrinsic value > market price
overvalued = intrinsic value < market price
fairly valued = intrinsic value = market price
What are the 3 major categories of equity valuation models? PMA
- Present Value Models (Discounted Cash Flow Models) (FCFE)
- Multiplier Models (Market Multiple Models)
- Asset-based Valuation Models
What is the difference between present value models and asset based valuation models?
present value models = intrinsic value is the present value of future benefits from the security.
asset based valuation models = intrinsic value is estimated as the market value of assets minus the estimated value of liabilities and preferred stock.
What are multiplier models?
Relative valuation of stock based on some fundamental multiplier of value like price to earnings, price to sales, etc.
What is the formula for asset based valuation models?
ABV intrinsic value = estimated value of assets - estimated value of liabilities - preferred shares
What is forward basis vs trailing basis?
forward basis = projected earnings per share next year
trailing basis = earnings per share for the past year
What is enterprise value formula?
EV = total market value of a company - cash and short-term investments
What is declaration date?
This is the day that the dividend’s authorization is announced.
What is ex-dividend date?
Starting this day, new owners will not be eligible to receive the previously declared dividend.
What is holder of record date?
On this day, the company records the list of owners who held shares at the close of trading on the day before the ex-dividend date.
What is payment date for dividends?
This is when the dividend is actually paid
What is extra special dividends vs liquidating dividend?
extra special = may be paid at any time outside the regular schedule, often when companies does well
liquidating dividend = paid to return capital to shareholders when a company goes out of business.
What are stock dividends?
grant extra shares to investors rather than cash
What is stock split vs reverse stock split?
Stock splits = increase the number of shares outstanding,
Reverse stock splits = reduce the number of shares outstanding
What is share repurchase?
Management can choose to repurchase shares if they believe that they are trading below their intrinsic value.
What is the basis of the dividend discount model?
intrinsic value of a share of stock = PV of expected future dividends
What is the formula for the dividend discount model?
v0 = (Dt / (1+r)^t) + (Pn / (1+r)^n)
v0 = intrinsic value of 1 share of stock
Dt = expected dividend in year t
r = require rate of return
Pn = expected selling price at end of investment horizon
How is free cash flow to equity valuation model different than dividend discount model?
FCFE = focuses on how much they can pay dividends
dividend discount model = focuses on expected dividends
What is FCFE formula?
FCFE = CFO - FCInv + Net Borrowing
CFO = cash flows from operations
FCInv = fixed capital investments
What is the intrinsic value of stock using the FCFE?
v0 = (FCFEt / (1+r)^t)
What is one method investors use to estimate R?
using CAPM
What is CAPM formula?
E (Ri) = Rf + Bi [E(Rm) - Rf)]
E (Ri) = expected return
Rf = risk free rate
Bi = beta, stock sensitivity to equity market
E(Rm) - Rf = market risk premium
E(Rm) = expected return of market
What is the preferred stock valuation formula, and the preferred stock valuation formula with a known maturity date?
preferred stock valuation = V0 = D0 /r
preferred stock valuation formula with a known maturity date = V0 = (Dt / (1+r)^t) + (F / (1+r)^n)
D0 & Dt = dividend
r = required rate of return
F = preferred stocks par value