Lecture Presentation Software   to accompany Investment Analysis and  Portfolio Management Seventh Edition by  Frank K. Re...
Applying the DDM  Valuation Model to the Market <ul><li>The stream of expected returns </li></ul><ul><li>The time pattern ...
Applying the DDM  Valuation Model to the Market <ul><li>Determinants of the Earnings Multiplier: </li></ul><ul><li>1.   Th...
Market Valuation Using the  Reduced Form DDM <ul><li>Estimating k and g for the U.S. equity market </li></ul><ul><li>The n...
Estimating Growth Rate <ul><li>Growth rate of dividends is equal to </li></ul><ul><ul><li>Retention rate - the proportion ...
Return on Equity (ROE) Profit  Total Asset  Financial Margin  Turnover  Leverage = x x
Market Valuation Using the Free Cash Flow to Equity (FCFE) Model <ul><li>FCFE is: </li></ul><ul><li>+ Net Income </li></ul...
Market Valuation Using the Free Cash Flow to Equity (FCFE) Model <ul><li>The Constant Growth FCFE Model </li></ul><ul><li>...
Market Valuation Using Relative Valuation Approach <ul><li>The price-earnings ratio (P/E) </li></ul><ul><li>The price-book...
Market Valuation Using Relative Valuation Approach <ul><li>Two-part valuation procedure </li></ul>
Market Valuation Using Relative Valuation Approach <ul><li>Importance of both components of value </li></ul><ul><ul><li>1....
Estimating Expected Earnings Per Share <ul><li>Estimating expected earnings per share </li></ul><ul><ul><li>Estimate sales...
Estimating Expected Earnings Per Share <ul><li>Alternative estimates of corporate net profits </li></ul><ul><ul><li>Direct...
Estimating Expected Earnings Per Share <ul><li>Estimating aggregate operating profit margins </li></ul><ul><ul><li>Capacit...
Estimating Expected Earnings Per Share <ul><li>Estimating depreciation expense </li></ul><ul><ul><li>time series trends </...
Estimating Expected Earnings Per Share <ul><li>Estimating interest expense </li></ul><ul><ul><li>debt levels </li></ul></u...
Estimating Expected Earnings Per Share <ul><li>Estimating the tax rate </li></ul><ul><ul><li>depends on future political a...
Estimating the Earnings Multiplier for a Stock Market Series <ul><li>Determinants of the earnings multiplier </li></ul><ul...
Estimating the Earnings Multiplier for a Stock Market Series <ul><li>Estimating the required rate of return (k) </li></ul>...
Estimating the Earnings Multiplier for a Stock Market Series <ul><li>Estimating an Earnings Mutiplier: An Example </li></u...
Other Relative Valuation Ratios <ul><li>Price to book value ratio (P/BV) </li></ul><ul><li>Price to cash flow ratio (P/CF)...
Analysis of World Markets <ul><li>Individual country analysis </li></ul><ul><ul><li>analyze economy and security markets b...
The Internet Investments Online <ul><li>www.ms.com </li></ul><ul><li>www.yardeni.com </li></ul><ul><li>www.nabe.com </li><...
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Lecture Presentation Software to accompany

  1. 1. Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Seventh Edition by Frank K. Reilly & Keith C. Brown Chapter 13
  2. 2. Applying the DDM Valuation Model to the Market <ul><li>The stream of expected returns </li></ul><ul><li>The time pattern of expected returns </li></ul><ul><li>The required rate of return on the investment </li></ul>
  3. 3. Applying the DDM Valuation Model to the Market <ul><li>Determinants of the Earnings Multiplier: </li></ul><ul><li>1. The expected dividend payout ratio </li></ul><ul><li>2. The required rate of return on the stock </li></ul><ul><li>3. The expected growth rate of dividends for the stock </li></ul>
  4. 4. Market Valuation Using the Reduced Form DDM <ul><li>Estimating k and g for the U.S. equity market </li></ul><ul><li>The nominal risk-free rate </li></ul><ul><li>The equity risk premium </li></ul><ul><li>The current estimate of Risk Premium and k </li></ul><ul><li>Estimating the growth rate of dividends (g) </li></ul><ul><ul><li>g = f(b,ROE) </li></ul></ul><ul><li>ROE = Net Income / Equity </li></ul>
  5. 5. Estimating Growth Rate <ul><li>Growth rate of dividends is equal to </li></ul><ul><ul><li>Retention rate - the proportion of earnings retained and reinvested </li></ul></ul><ul><ul><li>Return on equity (ROE) – rate of return earned on investment </li></ul></ul><ul><ul><li>An increase in either or both of these variables causes an increase in the expected growth rate (g) and an increase in the earnings multiplier </li></ul></ul>
  6. 6. Return on Equity (ROE) Profit Total Asset Financial Margin Turnover Leverage = x x
  7. 7. Market Valuation Using the Free Cash Flow to Equity (FCFE) Model <ul><li>FCFE is: </li></ul><ul><li>+ Net Income </li></ul><ul><li>+ Depreciation Expense </li></ul><ul><li>- Capital Expenditures </li></ul><ul><li>-  in Working Capital </li></ul><ul><li>- Principal Debt Repayments </li></ul><ul><li>+ New Debt issues </li></ul>
  8. 8. Market Valuation Using the Free Cash Flow to Equity (FCFE) Model <ul><li>The Constant Growth FCFE Model </li></ul><ul><li>The Two Stage Growth FCFE Model </li></ul>
  9. 9. Market Valuation Using Relative Valuation Approach <ul><li>The price-earnings ratio (P/E) </li></ul><ul><li>The price-book value ratio (P/BV) </li></ul><ul><li>The price-cash flow ratio (P/CF) </li></ul><ul><li>The price-sales ratio (P/S) </li></ul>
  10. 10. Market Valuation Using Relative Valuation Approach <ul><li>Two-part valuation procedure </li></ul>
  11. 11. Market Valuation Using Relative Valuation Approach <ul><li>Importance of both components of value </li></ul><ul><ul><li>1. Estimating the future earnings per share for the stock-market series </li></ul></ul><ul><ul><li>2. Estimating a future earnings multiplier for the stock-market series </li></ul></ul>
  12. 12. Estimating Expected Earnings Per Share <ul><li>Estimating expected earnings per share </li></ul><ul><ul><li>Estimate sales per share for a stock-market series </li></ul></ul><ul><ul><li>Estimate the operating profit margin for the series </li></ul></ul><ul><ul><li>Estimate depreciation per share for the next year </li></ul></ul><ul><ul><li>Estimate interest expense per share for the next year </li></ul></ul><ul><ul><li>Estimate the corporate tax rate for the next year </li></ul></ul><ul><li>Estimating Gross Domestic Product </li></ul><ul><li>Estimating sales per share for a market series </li></ul>
  13. 13. Estimating Expected Earnings Per Share <ul><li>Alternative estimates of corporate net profits </li></ul><ul><ul><li>Direct estimate of the net profit margin based on recent trends </li></ul></ul><ul><ul><li>Estimate the net before tax (NBT) profit margin </li></ul></ul><ul><ul><li>Estimate an operating profit margin to obtain EBITDA; estimate depreciation and interest to arrive at EBT; estimate the tax rate (T) and multiply by (1-T) to estimate net income </li></ul></ul>
  14. 14. Estimating Expected Earnings Per Share <ul><li>Estimating aggregate operating profit margins </li></ul><ul><ul><li>Capacity utilization rate </li></ul></ul><ul><ul><li>Unit labor costs </li></ul></ul><ul><ul><li>Rate of inflation </li></ul></ul><ul><ul><li>Foreign competition </li></ul></ul>
  15. 15. Estimating Expected Earnings Per Share <ul><li>Estimating depreciation expense </li></ul><ul><ul><li>time series trends </li></ul></ul><ul><ul><li>estimate based on property, plant, and equipment </li></ul></ul><ul><ul><ul><li>sales and turnover </li></ul></ul></ul><ul><ul><ul><li>depreciation </li></ul></ul></ul>
  16. 16. Estimating Expected Earnings Per Share <ul><li>Estimating interest expense </li></ul><ul><ul><li>debt levels </li></ul></ul><ul><ul><ul><li>total assets </li></ul></ul></ul><ul><ul><ul><li>expected capital structure </li></ul></ul></ul><ul><ul><li>interest rates </li></ul></ul><ul><ul><li>subtract result from EBIT to estimate EBT </li></ul></ul>
  17. 17. Estimating Expected Earnings Per Share <ul><li>Estimating the tax rate </li></ul><ul><ul><li>depends on future political action </li></ul></ul><ul><ul><li>multiply (1-T) times the EBT per-share to estimate the net income per share </li></ul></ul>
  18. 18. Estimating the Earnings Multiplier for a Stock Market Series <ul><li>Determinants of the earnings multiplier </li></ul><ul><ul><li>Dividend payout ratio </li></ul></ul><ul><ul><li>required rate of return on common stock </li></ul></ul><ul><ul><li>the expected growth rate of dividends for the stocks </li></ul></ul>
  19. 19. Estimating the Earnings Multiplier for a Stock Market Series <ul><li>Estimating the required rate of return (k) </li></ul><ul><ul><li>inversely related to the earnings multiplier </li></ul></ul><ul><ul><li>determined by risk-free rate, expected inflation, and the risk premium for the investment </li></ul></ul><ul><li>Estimating the dividend payout ratio (D/E) </li></ul><ul><ul><li>active decision or residual outcome? </li></ul></ul><ul><ul><li>time series plots </li></ul></ul><ul><ul><li>long-run perspective </li></ul></ul>
  20. 20. Estimating the Earnings Multiplier for a Stock Market Series <ul><li>Estimating an Earnings Mutiplier: An Example </li></ul><ul><ul><li>The Direction of Change Approach </li></ul></ul><ul><ul><li>Specific Estimate Approach </li></ul></ul><ul><li>Calculating an Estimate of the Value for the Market series </li></ul>
  21. 21. Other Relative Valuation Ratios <ul><li>Price to book value ratio (P/BV) </li></ul><ul><li>Price to cash flow ratio (P/CF) </li></ul><ul><li>Price to sales ratio (P/S) </li></ul>
  22. 22. Analysis of World Markets <ul><li>Individual country analysis </li></ul><ul><ul><li>analyze economy and security markets before analyzing alternative industries or companies </li></ul></ul><ul><ul><li>macro techniques </li></ul></ul><ul><ul><li>micro techniques </li></ul></ul><ul><ul><li>technical analysis </li></ul></ul><ul><ul><li>top down approach </li></ul></ul>
  23. 23. The Internet Investments Online <ul><li>www.ms.com </li></ul><ul><li>www.yardeni.com </li></ul><ul><li>www.nabe.com </li></ul><ul><li>www.agedwards.com </li></ul>

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