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13 Cards in this Set
- Front
- Back
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What is required for security valuation to be profitable? |
1. security must be mis-priced 2. price must converge to intrinsic value over investment horizon |
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If a security is followed by many investors, is it more or less likely to be fairly valued? |
More likely to be fairly valued |
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Dividend Discount Model Overview |
-Based on rationale that corporation has indefinite life -Stock's value = PV of future CASH dividends |
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Dividend Discount Model Formula |
Stock value = sum of D / (1+ cost of equity)^t Denominator is formula to discount dividend to present |
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Free Cash Flow to Equity Model |
-Same as dividend discount model except FCFE is used instead of dividends -FCFE: CFO - fixed capital investment + net borrowing |
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Gordon Growth Model |
-Assumes growth rate in dividends is constant -Stock value = D1 / cost of equity - sustainable growth rate |
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Sustainable Growth Rate |
Retention rate * ROE Retention rate = 1-dividend payout ratio |
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P/E Ratio Based on Fundamentals |
P0/E1 = (D1/E1) / (k-g) Where D1/E1 is dividend payout ratio |
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Enterprise Value |
Market value of common and preferred stock + market value of debt - cash and short term investments |
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How to get from enterprise value to equity value |
Enterprise value - market value of debt + cash and short term investments |
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Asset-Based Models |
Define a stock's value as the firm's total asset value minus liabilities and preferred stock, on a per-share basis |
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Advantages of Asset-Based Models |
1. can provide floor values 2. most reliable when firm has mostly tangible short-term assets, assets w/ a ready market value, or when firm is being liquidated 3. may be increasingly useful for valuing public firms if they report fair value |
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Disadvantages of Asset-Based Models |
1. market values of assets can be difficult to obtain and are usually different than book value 2. inaccurate when a firm has a large amount of intangible assets or future cash flows not reflected in asset value 3. asset values can be difficult to value during periods of hyperinflation |
