Study session 10 & 11 Flashcards
Intrinsec Value_analyst - price =
(IV_actual - price) + (IV_analyst - IV_actual)
Conglomerate discount
the amount by which market value under-represents sum-of-the-parts value
equity risk premium=
required return on equity index - risk-free rate
Two types of estimates of the equity risk premium
Historical estimates
Forward-looking estimates:Gordon Growth model, Macroeconomics models, survey estimates
Strength and weakness
+: theyse of proven models and models and current information
-: the estimates are only appropriate for developed countries where public equities represent a relatively large share economy
Ibbotson-Chen estimates of the risk premium
equity risk premium=
[1+î][1+rÊg][1+PÊg]-1+Ÿ-eRF
î= expected inflation rÊg= expected real growth in EPS PÊg= expected changes in the P/E ratio Ÿ= the expected yield on the index eRF= the expected risk-free rate
Fama-French Model for required return on stock j
required return of stock j= RF + B_mkt,j * (R_mkt - RF) + B_SMB,j * (R_small - R_Big) + B_HML * (R_HMB - R_LBM)
B = Beta SMB= small-cap minus big-cap HML = High book-to-market portfolio Minus Low book-to-market portfolio
Pastor-Stambaugh model of required return
it adds liquidity factor to the Fama-French model
less liquid assets should have a positice beta, while more liquid assets should have a negaive beta
Build-up method for required return and advantages
it is usually applied to closely held companies where betas are not readily obtainable
required return = RF + equity risk premium + size premium + specific-company premium
Bond-yield plus risk premium method
appropriate if the company has publicly traded debt
the method simply adds a risk premium to the yield to maturity (YTM) of the company’s long-term debt
Beta estimates for thinly traded stocks and nonpublic companies
unlevering Beta
Step 1 : identify a benchmark company XYZ, which is publicly traded and similar to ABC
Step 2: estimates the beta for XYZ
Step 3: Unlever XYZ’ Beta:
unlevered Beta XYZ = beta_XYZ* (1/ (1+debt of XYZ/Equity of XYZ))
Step 4: Lever up for ABC:
estimate of Beta for ABC=(unlevered Beta of XYZ)* (1+ debt of ABC/equity of ABC)
Porter’s Five Forces
Threat of new entrants in the industry Threat of substitutes Bargaining power of buyers Bargaining power of suppliers Rivalry among existing competitors
Definition of predictability
hiw accurately and how far into the future a company can forecast factors such as:
industry demand
corporate performance
market expectation
Definition of malleability/mutability
tue extent to wich a company and uta competitors can influence these industry factors
Strategy formulation style
1) Less predictable + less malleable
2) more predictable + less malleable
3) Les predictable + more malleable
4) more predictable + more malleable
1) adaptative
2) Classical
3) Shaping
4) Visionnary
Bottom-up vs Top-down approaches for developibg inputs to equity valuation models
Bottom-up: analysis starts with individual company analysis
Top-down: “”””” with expectation about a macroeconomic variable
hybrid: mix of both
Net debt
gross debt - cash, cash equivalents, and shor-term securities
Net interest expense
gross interest expense - interest income on cash and short-term debt securities
1) statutory rate
2) effective tax rate
3) cash tax rate
4) income tax expense
1) the % tax charged in the country where the firm is domicilied
2) income tax expense as a % of pretax income on the income statement
3) cash taxes paid as a % of pretax income
4) cash tax due + changes in deferred tax liabilities - changes in deferred tax assets
Return on invested capital (ROIC)
Net operating profit adjusted for taxes (NOPLAT) / invested capital (op. assets - op. liabilities)
Dividends are appropriate as a measure of cash flow in the following cases:
- The company has a history of dividend payment
- The dividend policy is clear and related to the earnings of the firm
- The perspective is that of a minority shareholder
Free cash flow models are most appropriate:
- For firms that do not have a dividend payment history or have a dividend payment history that is not clearly and appropriately related to earnings
- For firms with frer cash flow that corresponds with their profitability
- When the valuation perspective is that of a controlling shareholder
Residual income approach is most appropriate for:
- Firms that do not have dividend histories
- Firms that havenegative free cash flow fir the forseeabke future(usually due to capital demands)
- Firms with transparent financial reporting and high quality earnings
justified leading P/E
P_o / E_1 = D_0*(1+g)/E_0/(r-g)
= (1-b)*(1+g)/(r-g)
Valuation using the H-Model
(D_0(1+g_long term)/(r-g_long term))+(D_0H*(g_short term - g_long term)/(r-g_long term)
where H = t/2 = half-life in years of high-growth period
sustainable growth rate
retention rate * ROE
DuPont ROE
NI/Stockholder equity=
NI/Sales)(Sales/Total Assets)(Total assets/Stockholder’ equity
DuPont growth rate
((NI-dividend) / Ni)(NI/Sales)(Sales/Total assets)*(Total assets/stockholders’ equity)
