Reading #50 Equity Valuation: Concepts and Basic Tools Flashcards
Most General DDM formula
D / (1+k)^t
Value of 1 year holding period using DDM
(div to be rec’d/(1+K)) + (year end price / (1+k))
restate the DDM using FCFE
FCFE/ (1+k)^t
why can FCFE be used instead of the next dividend payout?
because it represents the potential ant of cash paid out to the common shareholder
preferred stock value formula
Div / k
formula to find value of preferred stock if matures in 1 year and has semi annual dividends
D1/ (1+.5k) + D2/(1+.5k)^2 + PAR VALUE/(1+k)^2. you use the par value (value at maturity), you have two div. growths because it is paid out semi annual. raise the second one to the second.
what types of companies are most appropriate to use constant growth or multistage DDM to value?
“stable, mature non cyclical dividend paying firms
when are good times to use price multiples?
they are easily calculated and can be used in time series and cross sectional comparisons”
price multiples based on com parables vs price multiples based on fundamentals
“compare price multiple for firm based on market price” versus “not dependent on current mkt prices of other firms to establish value”
define the P/E multiple
firms stockprice / EPS
define the P/S ratio
price-sales ratio is stock price / sales per share
define P/B ratio
Price-book ratio is firms stock price divided by book value of equity per shares
define P/CF ratio
price-cash flow ratio is firms stock price / cf per share (operating cash flow or free cash flow)
P/E formula
(D/E)/(k-g) it is the DDM model dividing both sides by earnings
lagging versus leading P/E
lagging uses earnings for a previous period and leading is for expected earnings next period
P/E will increase with what three ways?
- higher div payout 2. higher growth rate 3. lower required rate of return
define law of one price
“asserts that two identical assets should sell at same price or two comparable asses should have approx same multiple”
what re disadvantages of using price multiples based on com parables?
- stock may appear overvalued 2. different account methods not comparable 3. cyclical firms may be greatly affected by economic conditions at given point
enterprise value formula
common + pref shares + MV of debt - short term investments - cash
