S12: Stock Valuation Flashcards

1
Q

Common Stock Valuation

A

Determined using PV calculations determined by cashflows security is entitled to receive

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2
Q

Dividend Discount Model (DDM)

A

Equates the intrinsic or “true” value of a stock to the PV of all future dividends paid to the stockholder
1. Dividends over a discrete period
2. Constant dividend growth
3. Multistage growth

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3
Q

Dividends Over a Discrete Period

A

Rewrites PV formula, V0=P0=(D1+P1)/(1+k)^t

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4
Q

Calculator Steps Dividends Over a Discrete Period

A

CFo=0
CO1=D1
CO2=D2
COn=Dn+Pn
I=k

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5
Q

Market Efficiency

A

Price = Value

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6
Q

Undervalued

A

Price<Value

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7
Q

Overvalued

A

Price>Value

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8
Q

Constant Dividend Growth

A

V0=P0=D1/(k-g)

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9
Q

Gordon Growth Model

A

Divides dividends in next period by required rate of return - growth rate (also used to value preferred stock and dividend aristocrats)

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10
Q

Multistage Growth

A

V0=P0=(D1/(1+k))+(D2/(1+k)^2)+((D3+D4/(k-g))/(1+k)^3)

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11
Q

Calculator Steps for Multistage Growth

A

CFo=0
Co1=D1
Co2=D2
Co3=D3+(D4/k-g)
I=k

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12
Q

Undervalued

A

Current trade price<CPTed value, you should buy

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13
Q

Overvalued

A

Current trade price > CPTed value, you should sell

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14
Q

Required Rate of Return (k)

A

Return investors require from an investment in order for them to commit to it given its level of risk, used to discount dividends -> k=(D1/P0)+g

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15
Q

Capital Gains Yield (g)

A

Expectation that a security’s price will grow beyond original purchase price

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16
Q

Dividends Yield (D1/P0)

A

$ from dividends

17
Q

Capital Asset Pricing Model (CAPM)

A

A hallmark relationship in modern finance - used to calculate required or expected rate of return

18
Q

CAPM Formula

A

E(R)=rf+B(E(Rm)-rf) (what gov’t pays + a little more for the risk)

19
Q

rf

A

Risk free rate of return/yield of 90 day t-bill

20
Q

B

A

Stock’s beta, a measure of risk

21
Q

E(Rm)

A

Expected return of the stock market overall

22
Q

Beta

A

Tells us how much a stock moves relative to the overall market -> B * movement of market = stock’s movement

23
Q

PV of Free Cash Flows per Share

A

Other discounted cash flow model that can be used when firm doesn’t pay dividends

24
Q

Valuation by Comparables

A

Method like average selling price per square foot of similar homes, used to find stock’s implied price

25
Implied Price
What price should be theoretically based on current market valuations
26
Comps
Comparable firms in the same industy
27
Price-Earnings (PE) Ratio
Price per share/earnings per share
28
Price-Book Ratio
Price per share/book value of equity per share
29
Price-Sales Ratio
Price per share/sales revenue per share
30
Enterprise Value of EBITDA
A measure of the company’s total value -> (Market cap + Debt - Cash)/EBITDA
31
Why do markets exist?
Different investors reach different conclusions on whether a stock is under or overvalued based on different inputs and assumptions