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Strengths: 1. TV does not dominate the intrinsic value estimate; 2. RI
use accounting data which is usually easy to find; 3. applicable to
firm with no dividends or positive/volatile CF; 4. focus on ECONOMIC
profitability than on accounting profitability. Weakness: accounting
data can be manipulated; need to have clean surplus relationship ( B₁ =
B₀ + E₁ -D₁)
as known as Dollar-Cost Averaging; Portfolio or Index PE is best
calculated as the weighted Harmonic mean PE; When there are extreme
outliers, the arithmetic mean will be the most affected; Harmonic mean
put more weight on smaller values; For equal weighted, the harmonic mean
and weighted harmonic mean will be same.
(ROE-g)/(r-g) conclusion: P/B increases as ROE increases; The larger the spread b/t ROE and r, the higher P/B multiple.
NOI - Debt Service - Tax Payable; Tax Payable = (NOI - DEP - Int) (1-t)
1. Income taxes are paid in nominal earnings, not real earnings; 2.
Real cash outflow from NWC =/ the change in real NWC so calculate
nominal NWC 1st and convert them to real cash flows using the inflation
index; 3.Nominal CapEx is difficult to forcest since the relationship
b/t nominal Sales and nominal CapEx IS NOT constant when high inflation,
therefore CapEx, DEP and EBITDA should be focused on real basis.
1. Trailing: (1-b)(1+g)/(r-g); 2. Leading: (1-b)/(r-g); b: retention
ratio * trailing multiple will be larger then justified leading p/e
multiple by (1+g)
1. calculate the value of stock using DCF model; 2. dividing the
result by CF; For Example: V₀ = FCFE₀ * (1+g)/(r-g); then P/CF =
V₀/FCFE₀ --->conclusion: require return decreases or earning growth
increases will cause P/S multiple to increase.
RI₁ = E₁ - (r x BVS₀); E₁: EPS for year 1
1. Select and Calculate the firm multiple; 2. Select the benchmark and
calculate the mean/medium of PE over group of comparable stocks; 3.
Compare firm PE to benchmark PE; 4. Exam the difference and make
appropriate valuation adjustments;
D₀/P₀ = (r-g)/(1+g)
Need to adjust cash flows in a scenario analysis b/c 1. country risk
is diversifiable and one-sided; 2. company react differently to country
risk; 3. identifying cash flow effects aids in risk mgmt.
Persistence Factor: projected rate at which RI is expected to fade
over the life cycle of the firm. High PF indicates low dividend payout
and historical high industry PF; Low PF indicates high ROE, significant
level of non-recurring items and high accounting accruals. V₀ = B₀ + PV
of interim high-growth RI + PV of continuing RI; PV of continuing RI at
year t-1 = RI at year T / (1+r-w) w is the PF; If RI persists forever
then w =1 and plug in to above formula to derive PV of continuing RI. If
RI declines to
NetSellingPrice - Mortgage balance - Taxes if net selling price <
original cost --> recaptured dep < accumulated dep; if net
selling price >= original cost --> recaptured dep = accumulated
dep
EV = MV OF COMMON + MV OF PREFERED + MV of DEBT + MINORITY INTEREST -
CASH - INVESTMENTS; When used: 1. more useful then PE when comparing
firm with diff. degree of financial leverage; useful for valuing capital
intensive busineses with high level of DEP and AMORT; 3 usually
positive when EPS is not. Drawbacks: if WC is growing, then EBITDA will
overstate CFO; 2. FCFF captures FCInv, it more linked with valuation
theory, EBITDA would be OK if CAPEX = DEP;
1. relationship b/t PE and g is not linear; 2. PEG does not account
for risk; 3. PEG does not reflect the duration of the high-growth
period;
1. CF = NI + DEP +AMORT; 2. adjusted CFO = CFO + INT * (1-t); (it
ignores WCInv and NonCashRevenue; 3. FCFE = CFO -FCInv + NET
BORROWING;(prefered but more volatile) 4. EBITDA (better as indicator of
firm value)
1. direct income cap approach: MV = NOI/(r-g) = NOI / R₀ R₀ is the cap
rate. 2. Gross income multiplier approach: MV = gross income income
multiplier.
RI is NI (after subtracting interest expense) - charge for equity
capital based on the cost of equity; EVA is NOPAT (b/f subtract interest
expense) - charge for both debt and equity captial based on WACC.
However, they are both measuring eco income.
V₀ = B₀ + [ (ROE -r) * B₀ / (r-g) ] ; Need to know that implied growth rate can be calculated if re-arranging this formula.
Measures the value added for shareholders by mgmt during a given YEAR.
EVA = NOPAT - (WACC X Invested Capital) = EBIT (1-T) -$WACC; $WACC:
dollar cost of capital; Invested Capital: NetWC + NetFixedAssets = BV of
LT Debt + BV of EQUITY
FCF = NOPLAT +DEP -FCInv-WCInv
net profit margin [ (1-b) (1+g) ] / (r-g) ] --> conclusion: progit
margin increases or earning growth increases will cause P/S multiple to
increase.
1. market extraction : R₀ = NOI/MV; 2. band of investment R₀ =
Weighted Mortgage cost + Weighted Equity cost; 3 BuidUp: R₀ = pure rate +
liquidity premium + recapture premium + risk premium
difference b/t the MV of LT Debt and Equity and the BV of Invested
Capital; measures the value created by mgmt's decisions since
inceptions. MVA = MV - IC
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