Session 4 Flashcards
Residual income
The income in individual has left after all personal debts and expenses are paid in personal finance
The level used to help figure out the creditworthiness if potential borrower
Includes:
-Royalties
-Rental/real estate
-Interest
-Dividend income
Relative valuation
-Compares a firms value to that of its competitors to determine the firms financial worth
-Can be used to assess the value of a company’s stock price compared to other companies/industry average
Reflect current market views, no need for an intrinsic value - used by sector analysts - sector funds
-Analysts uses bc simple, don’t need detailed multi-year forecasts
Can be used to justify any value
Used for screening of stocks subjected to closer analysis
Valuation using price multiples
Select a performance measure Requires standardisation (ratios) Pick consistent variables for numerator/dominator -Numerator - market value equity -Dominator - earnings (EPS), sales, BVE -equity vs firm view Estimate price multiples for universe of comparable firms Apply cmorable firm multiples to firm
Difficulties with price multiples methods
Firms with poor performance (earnings = 0 or negative)
-Transitory effects (adjust if possible)
- Have to forecast performance
Selecting comparable firms
Changes in market/sector valuations will affect asset values
Stock screening and asset management
Allows fast analysis of a large set of variables affecting valuations
Identify deviations from expected valuation
-automated investments in passive and quant funds
-active fund managers & analysts use screening to identify stocks subjected to closer analysis
P/BE
Price to book ratio ROE Earnings growth Cost of equity capital Payout ratio
Extended data analysis
Regression models can account for multiple determinants
Based on regression equation, look @ difference between predicted valuation and actual valuation
More complex estimation techniques
Alternative multiples
All models of screening require careful, informed selection of variables
Difficulties with price multiples screening methods
Data issues
-Firms with poor performance e.g. earnings =0/negative
-Standardisation
Size of data matters
-Ideally large set of comparable firms w/ normal valuations for the estimation procedure
Stability and performance of the model
-with large enough data set
-Model valuation: split actual sample into estimation and validation sample
DDM SUMMARY
Dividend discount model
The quantitative method used for predicting the price of a company’s stock based on theory that its present-day price is worth the sum of all its future dividend payments when discounted back to present value
DCF summary
Discounted cash flow
A model/method of valuation in which future cash flows are discounted back to a present value using the time-value of money
Residual income summary
The income An individual has left after all personal debts and expenses are paid in personal finance
Price multiples summary
A ratio that uses a company’s share price in combination with a per-share financial metric. Investors & analysts use price multiples to gain insight into a company’s valuation as part of the process of reviewing a company to potential investment
