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Valuation
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Transcript

  • 1. Basic Valuation Concepts
    • Dividend valuation models
      • Constant growth
      • Non-constant growth
      • Finite/infinite holding period
    • Earnings valuation models
      • P/E Ratio based model
      • Dividend and Earnings model
    • Other Valuation models
      • Price to Sales
      • Price to Dividends
      • Price to Earnings
      • Price to Cash flow
      • Price to Book Value
  • 2. 1. General Dividend Models The value of a share of stock is equal to the present value of an expected stream of future dividends. P 0 = Where P 0 = Present value of the stock price D i = Dividend for each year K e = Required rate of return (discount rate) Model assumes that the investor can determine the dividend for each period and the required rate of return. D 1 (1+K e ) 1 D 2 (1+K e ) 2 + D 3 (1+K e ) 3 + D n (1+K e ) n +. . +
  • 3. Constant Growth Model For extremely long time (infinite holding period) periods, this formula reduces to if following conditions are met. 1. g is constant 2. K e > g P 0 = + D 0 (1+g) 3 (1+K e ) 3 D 0 (1+g) 2 (1+K e ) 2 + D 0 (1+g) n (1+K e ) n + ... + D 0 (1+g) 1 (1+K e ) 1 P 0 = D 1 (K e - g)
  • 4. Required Return K e = Required rate of return R F = Risk-free rate b = Beta Coefficient K M = Expected return for common stocks in the market (K M - R F ) = Equity risk premium (ERP)
  • 5.  
  • 6. A Nonconstant Growth Model
    • 1. Divide time period into intervals of constant dividend growth
    • 2. Calculate the dividend at the beginning of each period
    • 3. Calculate the Present Value of each interval of constant growth
    • 4. Price = Sum of the PVs
  • 7. Figure 7-1. JAYCAR Growth Pattern. Dividends per share 20% (years 1-10) 8% (years 11 to infinity) 1 5 10 15 20 25 30 35 40 45
  • 8. Non-constant growth illustration P 10 = D 11 / (K e - g) Dividend Year 11 = Div 10 x (1+ growth rate) = 5.15 ( 1.08) = 5.56 P 10 = 5.56 / (12% - 8% ) = 5.56 / .04 = $139 Discount to Present: $139 / .322 = $44.76 P 0 = $12.42 Growth pattern first ten years JAYCAR's + $44.76 = $57.18
  • 9. 2. Combined Earnings and Dividend Model
    • The value of common stock can be viewed as a dividend stream plus a market price at the end of the dividend stream.
    • Earnings-per-share and dividends-per-share are estimated for some period.
    • Ending stock price estimated by using long-term PE ratio.
    • Stock Price = (Present value of dividend flow) + Present value of stock price
  • 10. Price Earnings Ratio
    • It indicates the price that investors are willing to pay for a firm’s earnings.
    • Published P/E ratios based on today’s price divided by the latest 12-month earnings.
    • P/E ratios can be a proxy for risk. The higher the P/E ratio relative to the market P/E ratio, the higher the risk.
  • 11. Price Earnings Ratio
    • P/E ratios vary across industries.
    • P/E ratios are also influenced by the political and economic conditions, management abilities and quality of earnings.
  • 12.  
  • 13.  
  • 14. Calculating Value based on relative P/E
  • 15.  

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