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D(p)/r(p)
A company with economies of scale will have lower costs and higher
operating margins as production volume increases, and should exhibit
positive correlation between sales volume and margins.
- BV is a cumulative amount that is usually positive, even when a firm
reports a loss and EPS is negative. P/B can be used when P/E cannot.-
BV is more stable than EPS so it is more useful when EPS is
high/low/volatile.- BV is the right measure of NAV for firms that hold
primarily liquid assets.- P/B can be used for companies that are going
out of business- P/Bs can help explain the long term differences in long
run average stock returns.Disadvantages:- Do not recognize the value of
nonphysical assets- Can
Required return on stock J = current risk-free return + (equity risk premium) * (beta of stock J)
Required return on stock J = Risk free return + Beta (market, J) +
Beta (SMB, J) (small cap risk premium) + B (HML, J) (value risk
premium)
Similar to the risk premium approach, but, doesn't use betas to adjust
for exposure to a factor. The bond yield plus risk premium method is a
type of build-up method.
When forecasting revenue with "growth relative to GDP growth"
approach, the relationship between GDP and company sales is estimated,
and then company sales growth is forecast based on an estimate for
future GDP.The "market growth and market share" approach begins with an
estimate of industry sales (market growth) and then company sales are
estimated as a percentage "market share" of industry sales. Forecast
revenue then equals the forecasted market size multiplied by the
forecasted market share.
Refers to the amount by which market price is lower than the sum of
the parts value - the apparent price reduction applied by the markets
that operate in multiple industries
First method: Forecast the FCFF or FCFE at the point in time at which
CFs begin to grow at a constant rate. Use the single stage DDM.Second:
use valuation multiples.Terminal Value = (Trailing P/E) * (earnings in
Year N)Terminal Value = (Leading P/E) * (Forecasted earnings in year
N+1)
P(0) = V(0) = D(1)/(r-g)g= r - (D(1)/P(0))
The increase in the price of asset plus an CF received from the asset, divided by the initial price of the asset.
COGS is primarily a variable cost and is often modeled as a percentage
of estimated future revenue. Expectations of changes in input prices
can be used to improve COGS estimates.The R&D and corporate parts of
SG&A are likely to be stable over time while selling and
distribution costs will tend to increase with increases in sales.The
primary determinants of gross interest expense are the amount of debt
outstanding (gross debt) and interest rates. Net debt is the gross debt
minus cash, cash equivalents, and s
Predictability defines how accurately and how dar into the future a
company can forecast industry factors such as demand, corporate
performance, and market expectations. Malleability is the extent to
which a company and its competitors can influence the industry.
Stock valuation can be approached using DDMs for single periods, and
multiple holding periods. No matter what the holding period, the stock
price is the present value of the forecasted dividends plus the present
value of the estimated terminal value, discounted at the required
return.
The FCFE approach takes a control perspective which assumes that
recognition of value should be immediate. DDM takes a minority
perspective under which value may not be realized until the dividend
policy accurately reflects the firms long-run profitablity.
ERP is the return over the risk free rate that investors require for
holding equity securities. The historical estimate of the ERP consists
of the difference between the mean return on a broad-based, equity
market index and the mean return on the US T-bills over a given time
period.
Dividends, sahre repurchases, and share issues have no effect on
either FCFF or FCFE. Changes in leverage have only minor effect on FCFE
and no effect on FCFF.For example, a decrease in leverage through a
repayment of debt will decrease FCFE in the current year and increase
forecasted FCFE in future years as interest expense is reduced.
(E0/S0)(1-b) (1+g) / (r-g)
Leading: P(0)/E(1) = D1/E1/(r-g) = (1-b)/(r-g)Trailing: (1-b)(1+g)/(r-g)
Abs Value Model estimates an asset's intrinsic value (Discounted
Dividend Approach); Relative Value Models estimate an asset's investment
characteristics compared to the value of other firms (comparing P/E
ratios)
NI is poor proxy for FCFE. Net income includes non cash charges
(depreciation) that have to be added back to arrive at FCFE. In
addition, it ignores cash flows that don't appear on the income
statement, such as investments in working capital and fixed assets as
well as net borrowings. EBITDA is a poor proxy for FCFF. EBITDA doesn't
reflect the cash taxes paid by the firm and it ignores the cash flow
effects of the investments in working capital and fixed capital.
- Contributes to total investment return- Dividends are not as risky
as the capital appreciation component of total returnDisadvantages:-
Dividend yield is only one component of the return on a stock- All else
equal, higher dividends will lead to slower growth, which drives the
other component of returns, price appreciation
FCFF - (Int*(1-T)) + net borrowingNI + NCC - FCinv - WCinv + net borrowingCFO - FCinv + net borrowing
(ROE-g)/(r-g)
Fama-French model + liquidity factor
The rate used to find the PV of an investment
IV is the value of an asset or security set by someone how has a
complete understanding of characteristics of the asset or issuing firm -
this may diverge from the market value.IV(analyst) - Price =
(IV(actual) - Price) + (IV(analyst) - IV(actual))
The required return averaged across all suppliers of capital (e.g.
debt and equity holders).(MV Debt/MV Debt+Equity)(Rate Debt)(1-T) + (MV
Equity/MV Debt+Equity)(Rate Equity)
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