Reading 50: Equity Valuation: Concepts and Basic Tools Flashcards
The Dividend Discount Model (for intrinsic value of a share)
50.1
Equity Valuation
Where:
V0 = value of a share of stock today, at t = 0
Dt = expected dividend in year t, assumed to be paid at the end of the year
r = required rate of return on the stock
The Dividend Discount Model plus selling price
50.2
Equity Valuation
Where:
P1 = the expected price per share at t = 1
General Expression for an n-period holding period or investment horizon
(present value)
50.3
Equity Valuation
Where:
Pn = the expected selling price (terminal value)
Free-Cash-Flow-to-Equity (FCFE)
50.4
Equity Valuation
Where:
FCinv = Fixed capital investment
Capital Asset Pricing Model (CAPM)
(basic)
50.5
Equity Valuation
Present Value of a Perpetuity
50.6
Equity Valuation
For a non-callable, non-convertble perpetual preferred share paying a level dividend D and assuming a constant required rate of return over time
Estimated Intrinsic Value of a non-callable, non-vonvertible preferred stock with maturity at time n
50.7
Equity Valuation
F = preferred stock’s par value
Gordon Growth Model (expanded)
50.8
Equity Valuation
Gordon Growth Model
(if required return r is assumed to be strictly greater than growth rate g)
50.9
Equity Valuation
Under that condition, the square-bracketed term of the expanded equation (50.8) is an infinite geometric series and sums to [(1+g)/(r-g)]. Which is then substituted in
Sustainable Growth Rate
50.10
Equity Valuation
Where:
g = dividend growth rate
b = earnings retention rate = (1- Dividend payout ratio)
ROE = return on equity
2 Stage Valuation Model (main formula; V0)
(Multistage Dividend Discount Models)
50.11
Equity Valuation
Where:
gs = short term growth rate
n = how many years of short term growth rate
Vn = Intrinsic value in year n; represents the year n value of the dividends recieved during the sustainable growth period or the terminal value at time n.
Vn can be estimated by using the Gordon growth model 50.12, where gL is the long-term or sustainable growth rate.
The dividend in year n+1, Dn+1, can be determined using equation 50.13
2 Stage Valuation Model (Vn) Part 2
(Multistage Dividend Discount Models)
50.12
Equity Valuation
Where:
gs = short term growth rate
n = how many years of short term growth rate
Vn = Intrinsic value in year n; represents the year n value of the dividends recieved during the sustainable growth period or the terminal value at time n.
Vn can be estimated by using the Gordon growth model 50.12, where gL is the long-term or sustainable growth rate.
The dividend in year n+1, Dn+1, can be determined using equation 50.13
2 Stage Valuation Model (Dn+1) Part 3
(Multistage Dividend Discount Models)
50.13
Equity Valuation
Where:
gs = short term growth rate
n = how many years of short term growth rate
Vn = Intrinsic value in year n; represents the year n value of the dividends recieved during the sustainable growth period or the terminal value at time n.
Vn can be estimated by using the Gordon growth model 50.12, where gL is the long-term or sustainable growth rate.
The dividend in year n+1, Dn+1, can be determined using equation 50.13
Gordon Growth Model Assuming Price Equals Intrinsic Value
(P0 = V0)
50.9.1
Equity Valuation
Model for Justified Forward P/E
(using restated Gordon Growth Model (P0))
50.14
Equity Valuation
E1 = Forecast for next year’s earnings
dividend payout ratio, p, is the ratio of dividends to earnings
