L Pch15
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L Pch15 L Pch15 Presentation Transcript

  • Investments Chapter 15: Stocks: Valuation and Selection
  • Dividend Discount Models (DDMs)
    • Models based on the principle that the intrinsic value of an asset is the present value of all its expected future cash flows.
  • Generalized DDM
    • where E ( DPSt ) is the expected dividend per share paid at the end of Year t,
    • and k is the proper discount rate at which the cash flows are discounted.
  • The Constant Dividend Growth Model: I
    • Also known as the Gordon Growth Model.
    • Assumes that a firm’s expected earnings per share grow at a constant growth rate ( g ) and that it pays a constant percentage of its earnings as dividends:
  • The Constant Dividend Growth Model: II
    • The general DDM equation then reduces to the following simplified valuation equation:
  • Estimating the Inputs: g
    • 1. Historical extrapolation:
    • 2. Implied values:
  • Estimating the Inputs: k
    • 1. Based on the CAPM:
    • 2. Implied values:
  • Super-growth Firms
    • A super-growth firm can increase the growth rate of the EPS and DPS with no change in their dividend policy.
    • For the valuation of super-growth firms, the following equation applies:
  • Multi-stage Growth Models
    • Two-stage growth models
    • Firm assumed to first experience super-growth and then normal growth.
    • Three-stage growth models
    • Firm assumed to evolve through three stages: growth, transition and maturity.
  • Weaknesses in DDMs
    • 1. DDMs do not explain why mispricing occurs or when it will be corrected.
    • 2. The discount rate may change over time.
    • 3. DDM results are highly sensitive to the choice of input parameters.
    • 4. The DDM is forward-looking, while most investors base their estimates on the past.
    • 5. It’s difficult to assess the performance of the DDM.
  • The Free Cash Flow Model
    • Values a firm ‘as if’ it distributes the maximum sustainable amount of dividend, this maximum is known as the free cash flow .
    • The value of a normal-growth firm can then be calculated as:
  • Valuation Multiples: I
    • A value driver is a variable that is supposed to measure the intrinsic value of a firm’s equity.
    • Multiples are the ratio of the market price of a share, or the market price of a firm, to a value driver.
  • Valuation Multiples: II
    • The price/earnings (P/E) ratio.
    • The dividend yield.
    • Tobin’s q.
  • Security Analysis
    • Three approaches to security analysis:
    • 1. Firm-level analysis.
    • 2. Industry analysis.
    • 3. Macroeconomic analysis.