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Compare price multiple such as P/E for a firm to those of other firms based on market prices
public firm that needs capital quickly sells private equity to investors.
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)
Sector, industry, sub-industryGICG by S&PMSCI BarraRussell Global
SectorsIndustry classification benchmark by Dow Jones and FTSE
set of similar companies an analyst will use for valuation comparisons
increase in debt during the period and is assumed to be available to shareholders.
investors buy all of firms equity using debt financing (leverage). If
LBO is firms current management it's a management buyout. (MBO).
-based on fundamental concept of discounted PV and well grounded in finance theory-Widely accepted in analyst community
no voting rights usually, fixed periodic payments.
usually issued to institutional investors via private placements.
-less liquidity, no public market-share price negotiated between firm
and investors-More limited firm financial disclosure, no gov't
exchange-Lower reporting costs-potentially weaker corporate
governance-greater ability to focus on long-term prospects, no public
short term pressure-potentially greater return once goes public
traded in different currencies on stock exchanges around the world
stock price / cash flow per share (operating or FCF)
measures total company value. Viewed as what it would cost to acquire firm
jointly developed by those countries
Produced by United Nations in 1948 to increase global comparability of data
-mkt values are often difficult to obtain-mkt values are usually
different than book values-inaccurate when a firm has high proportion of
intangible assets or future cash flows not reflected in asset
values.-assets can be difficult to value during periods of
hyperinflation
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.
Growth has slowedIntense competitionIncreasing Industry
overcapacityDeclining profitabilityIncreased cut costingIncreased
failures
produce capital goods for commercial services industries-heavy machinery-aerospace-defense
firms are less cyclical and sell goods and services-food-beverage-tobacco
do not accumulate over time when they are not paid but dividends for
any period must be paid before common shareholders can recieve.
1) stock may appear overvalued by comparable but undervalued by
fundamental2) different accting methods can result in price multiples
that are not comparable across firms3) price multiples for cyclical
firms may be greatly affected by economic conditions
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
- investment and return are in foreign currency- foreign stock
illiquid-reporting requirement of foreign stock less strict-investors
must be familiar with the regulations and procedures of each market in
which the invest.
low price-to-book
- evidence that some price multiples are useful for predicting stock
returns-price multiples widely used-price multiples readily
available-Can be used in time series and cross-sectional
comparisons-EV/EBITDA useful when comparing firm values independent of
cap structures or when earnings are negative and PE can't be used
-inputs must be estimated-value estimates are sensitive to input values
analyst compares a stock price multiple to a benchmark value based on
an index, industry group of firms, or a peer group of firms within an
industry.
assumes annual growth rate of dividends, ge, is constantVo = Do
(1+Gc)^1 / (1+Ke).....uses single constant growth rate of dividends and
is most appropriate for valuing stable and mature, non-cyclical,
dividend-paying firms
firms stock price / sales per share
Po = D1 / K-G
- difference between widens, stock value falls- difference narrows,
stock rises- small changes in difference can cause large changes in
stock value
Net Income+ depreciation- increase working capital- fixed capital
investment (FCInv)- debt principal repayments+ new debt Issues
based on rationale that intrinsic value of stock is the PV of future
dividendsVo = SUM (Dt / (1+ke)^t)Vo - current stock valueDt - dividend
at time tKe- required rate of return on common equity
rational value investors would place on asset if they had full knowledge of assets characteristics
- 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.
should be a component of an analysts strategic analysis.-embryonic-growth-shakeout-mature-decline
shareholders can allocate their votes to one or more candidates as they choose.
Vo = SUM FCFEt / (1+Ke) ^t
-provide floor values-most reliable when firm has primarily tangible
short-term assets, assets with ready market values, or when firm is
liquidated-increasingly useful for valuing public firms that report fair
values
denominated in US dollars and trade in the US.
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