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intrinsic value of common stock is estimated as total asset value minus liabilities and preferred stock.
stock price / cash flow per share (operating or FCF)
Firms stock price divided by book value of equity per share
-inputs must be estimated-value estimates are sensitive to input values
Global Industry Classification Standard (GICS)Russell Global Sectors (RGS)Industry Classification Benchmark
investors buy all of firms equity using debt financing (leverage). If
LBO is firms current management it's a management buyout. (MBO).
receive an extra dividend if firm profits exceed a predetermined level
and may receive a value greater than par of preferred stock if firm is
liquidated.
assuming we have correct inputs for D1, E1, Kc and g, the equation
above will provide a P/E ratio that is based on the PV of future cash
flows. (leading PE ratio)- serves a benchmark for the price at which the
stock should trade
sum PV of estimated dividends over holding period.value = D1 / (1+Ke),,,,,
-based on theoretically sound valuation models-correspond to widely accepted value metrics
higher price-to-book
bankinginsurancereal estate
(1 - dividend payout ratio)proportion of net income that is not paid out as dividends and goes to RE thus increasing equity
Initial Margin = 1 / leverage ratio= P0 x (1 - initial margin / 1 - maintenance margin)
- Preferred dividend is higher than common dividend- firm is
profitable, the investor can share in profits by converting their shares
into common stock- Conversion option becomes more valuable when the
common stock price increases- Preferred shares have less risk than
common shares because the dividend is stable, and they have priority
over common stock in receiving dividends and in the event of liquidation
of the firm.
shows the cost per unit relative to output
-based on fundamental concept of discounted PV and well grounded in finance theory-Widely accepted in analyst community
do not accumulate over time when they are not paid but dividends for
any period must be paid before common shareholders can recieve.
future prices and the roll yield
Sector, industry, sub-industryGICG by S&PMSCI BarraRussell Global
SectorsIndustry classification benchmark by Dow Jones and FTSE
- difference between widens, stock value falls- difference narrows,
stock rises- small changes in difference can cause large changes in
stock value
NI / Average BV
Slow growthConsolidationHigh barriersStable PricingSuperior Firms Gain Market Share
Negative GrowthDeclining pricesConsolidation
firm hopes to drive out competitors and later increase prices. laws prohibiting , hard to prove if prices not easily traced
claim equal to par value in the event of liquidation and do not share in firms profits.
jointly developed by the US, Canada and mexico
total value of a firms outstanding equity shares based on market
prices and reflects the expectations of the investors about the firms
future performance.
act as a custodian and manages dividends, stock splits, and other
events. Investor does not have to convert to the foreign currency, the
value of the DR is affected by exchange rate changes as well as firms
fundamentals, economic events and other factors
rational value investors would place on asset if they had full knowledge of assets characteristics
expected equilibrium total return (including dividends) on it's shares
in the market. Using dividend discount model or capM. Decrease in share
price will increase the expected return on the shares and increase in
share price will decrease expected returns. Increase in required return
used to discount future cash flows will decrease intrinsic value. Vice
versa
add the PV of dividends expected during the high-growth period to the
PV of the constant-growth value of the firm at the end of the
high-growth periodValue = D1 / (1+Ke)
Historically group firms by highly correlated returns
similar to the ISIC, but is designed for Europe
one whos earnings are highly dependent on the stage of the business
cycle. High earnings volatility and high operating leverageex) autos,
housing, technology
building materialschemicalspaper and forest productscontainers and packaging
overweighting or underweighting industries based on current phase of business cycle
shareholder the right to sell the shares back to the firm at a specific price. places a floor under the share value.
having someone else vote as they direct them on their behalf
based on idea that equity value is the market or fair value of assets minus the market or fair value of liabilities.
Value = (dividend to be rec'd / (1+Ke) ) + (year end price / (1+Ke))
Vo = D1 / Ke - GcValuation model for preferred stock is the same as the constant growth model with no growth (g = 0)
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