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96 Cards in this Set
- Front
- Back
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intrinsic value
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value of the asset given a hypothetically complete understanding of the asset's investment charecteristics
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absolute valuation model
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model that specifies an asset's intrincis value
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sum-of-the-parts valuation
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a valuation that sums the estimated values of each of the company's businesses as if each business were an independent going concern. Value derived is called break up value or private market value.
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ADR Level I
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company doesn't comply with SEC and shares can be traded on OTC not NASDAQ
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ADR Level II
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registered with SEC and shares can be traded on NASDAQ, NYSE, ASE
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ADR Level III
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company can raise capital through ADR public offering
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close end fund
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investment vehicle that buys stocks in the market; in turn shares of the close end fund are traded on the stock market at a price determined by supply and demand for that fund.
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GGM equity risk premium estimate is
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dividend yield on index based on year ahead aggregate forecasted dividends and aggregate market value Plus consensus long term eqrning growth rate Minus long term goverment bond yield
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expected growth in P/E ratio
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is reflecting efficient market
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CAPM major assumptions
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-investors are risk averse
-they make investment decisions based on the mean return and variance on returns on their total portfolio. |
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Steps for estimating B for a non-traded company
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1) select benchmark beta
2) estimate benchmark beta 3) unlever benchmark beta 4) lever the beta to reflect subject company's financial leverage |
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in macroeconomic factor models the factors are
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economic variables that affect the expected future cash flows of companies and/or the discount rate that is appropriate to determine their PV
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in statistical factor models statistical methods are applied to historical returns to determine
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portfolio of securities (serving as factors) that explain those returns in various senses.
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Five factor BIRR model
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1) confidence risk
2) time horizon risk 3) inflation risk 4) business cycle risk 5) market timing risk |
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neoclassical growth theory
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assumes that marginal productivity of capital declines as more capital is added
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endoheneous growth theory
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assumes that the marginal productivity of capital does not necessarily decline as capital is added
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steady state
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condition of no change in capital per capita. This comes about when the savings rate times GDP per capita just matches the investment required to maitain the ammount of capital per capita
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economies of scale
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as a company expands, its fixed costs may be spread over a larger output and average cost decline over a range of output.
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economies of scope
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as a company produces related products, exprience and reputation with one product may spill over to another product
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Herfindall Index
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always has value that is smaller than 1. The smaler the value the less dominant is the player
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1/H
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indicated how many companies of equal size could be in the industry
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Franchise P/E value
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is related to the present value of growth opportunities (PVGO)
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franchise values is created for excisting shareholders when
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the company can reinvest past earnings (b>0) at a rate of return (ROE) higher than the market-required rate r.
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the higher the inflation rate
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the more negative is the influence on the stock price if full inflation pass-through cannot be achieved
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confidence factor
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measured by the difference in return on risky corporate bonds and on goverment bodns
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time horizon factor
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measured as the difference between the return on a 20-year government bond and a 1-month Treasury Bill
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iflation factor
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measured as the difference between the actual inflation for a month and its expected value, computed the month before, using an economic inflation model
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business cycle factor
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measured by monthly variation in a business activity index
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market-timing factor
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measured by the part of the S&P 500 total return that is not explained by the first four factors
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Industry analysis:
Industry classification |
-life cycle position
-business cycle |
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Industry analysis:
external factors |
-technology
-government -social -demographic -foreign |
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Industry analysis:
demand analysis |
-end users
-real and normal growth -trend and cyclical variation around trends |
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Industry analysis:
supply analysis |
-degree of concentration
-ease of entry -industry capacity |
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Industry analysis:
Profitability |
-supply/demand analysis
-cost factors -pricing |
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growth
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above-normal expansion in sales and profits occurs independent of the business cycle
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defensive
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stable performace during both ups & downs of business cycle
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cyclical
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profitability tracks the business cyclce often in an exaggerrated manner
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definition of returns as dividends and the DDM is most suitable when
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-the company is dividend paying
-the board of directors has established a dividend policy that bears an understandable and cinsistent relationship to the company's profitability -investor takes a noncontrol perspective |
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FCFF
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cash flow from oparations minus capital expenditures
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FCFE
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cash flow from operations minus capital expenditures, minus all payments to debtholders
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using FCFE or FCFF is most suitable when
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-company is not dividend paying
-company is dividend-paying but dividends significantly exceed or fall short of FCFE -company FCF allign with the company's profitability within a forecast horizon -investor takes control perspective |
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residual income
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earnings for that period in excess of investors' required return on begining-of-period investment
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residual income model is the most suitable when
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-company is not paying dividends
-company's expected FCF are negative |
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fixed rate perpetual preferred stock
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stock with a special dividend rate that has a claim on earnings senior to the claims of common stock, and no maturity date
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Present value of growth opportunities (PVGO)
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aslo known as the value of growth, sums the expected value today of opportunites to profitably reinvest future earnings
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no-growth company
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a company without positive expected NPV projects
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current or trailing P/E
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today's market price per share divided by trailing 12 months' earnings per share
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leading or forward P/E
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today's market price per share divided by a forecast of the next 12 months" earnings per share or some time the next year 's earnings per share
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justified (fundamental) P/E
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P/E justified on the basis of fundamentals
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company can increase its ROE by
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increasing ROA or by the use of leverage
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FCFF model is chosen when
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-levered company with negative FCFE
-levered company with a changing capital structure |
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price multiples
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are ratios of a stock's market price to some measure of fundamental value per share
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enterprise value multiples
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relate the total market value of all sources of a company's capital to a measure of fundamental value for the entire company.
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basic earnings per share data reflect
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total earnings divided by weighted average number of shares outstanding
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diluted earnings per share reflect
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division by th enumber of shares that would be outstanding if holders of securities such as executive stock options, equity warrants, and convertible bonds exercise their options to obtain common stock
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the method of historical average EPS
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normalized EPS is calculated as average EPS over the most recent full cycle.
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the method of average return on equity
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normalized EPS is calculated as the average ROE from the most recent full cycle, multiplied by current book value per share
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inverse price ratio
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reciprocal of th eoriginal ratio, which places price in the denominator
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E/P
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earnings yield. Ranked by earnings yield from highest to lowest, the securities are correctly ranked from chipest to most costly in terms of the amount of earnings one unit of currency buys
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Justified P/E and stock's required rate of return
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inversly related
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justified P/E and growth rate of future expected CF
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positively related
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if the subject stock has higher-than-average or higher-than-median expected earnings growth
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a higher P/E than the benchmark is justified
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if the subject stock has higher-than-average or higher-than-median risk (operating or financial)
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a lower P/E than the benchmark is justified
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PEG ratio
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P/E devided by expected earnings growth rate in %. Stocks with lower PEG are more attractive than stocks with higher PEGs all else being equal.
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trading rule based on Fed Model considers
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the stock market to be overvalued when market's current earnings yeild is less than the 10-year Treasury bond yeild
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shareholders' equity
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total value of equity claims that are senior to common stock= common shareholders' equity
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enterprise value multiples
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are multiples that relate the enterprise value of a company to some measure of value. Enterprise value multiples are relatvely less sensitive to the effects of financial leverage than price multiples
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enterprise value
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is a total value (the market value of debt, commnon equity, preferred equity) minus the value of cash and short term investments
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return on invested capital (ROIC)
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calculated as operating profit after tax devided by total invested capital
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lower EV/EBITDA
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indicates that a company is relatively undervalued
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total invested capital (TIC) or market value of invested capital
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is the alternative to enterprise value. Similar to EV, TIC includes the market value of equity and debt, but does not deduct cost and investments.
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momentum indicators
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-earnings surprise
-standardized unexpected earnings -relative strenght=price momentum |
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look ahead bias
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the use of information that was not contemporaneously available in computing a quantity.
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capital charge
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the company's total cost of capital in money terms
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company with positive residual income
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is the company that generates more income than its cost of obtaining capital
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residual income=economic profit
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it is an estimate of the profit of the company after deducting the cost of all capital: debt and equity
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residual income model
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is a sum of current book value of equity and the PV of expected future residual income
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recognition of value in RI model
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occures earlier than in DDM
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Tobin's q
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the ratio of the market value of debt and equity to the replacement cost of total assets
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Continuing RI
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is RI after forecast horizon
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lower RI persistence
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-extreme acct rates on return (ROE)
-extreme levels of special items -extreme levels of acct. accruals |
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higher RI persistence
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-low dividend payout
-high historical persistence in the industry |
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2 principle drivers of RI
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1) ROE
2) BV |
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income approach
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values an asset as the present discounted value of the income expected from it
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market approach
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values an asset based on pricing multiples from sales of assets viewed as similar to the subject asset
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asset-based approach
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values a private company based on the values of the underlying assets of the entity less the value of any related liabilities.
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income approach types:
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1) free cash flow method
2) capitalized cash flow method 3) residual income method, value of intangible assets is added to the value of working capital and fixed assets to arrive at the value of the business enterprise |
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guideline public company method (GPCM)
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establishes value estimate based on the observed multiples from trading activity in the shares of public companies viewed as resonably comparable to the subject private comapny
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guidline transaction method (GTM)
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establishes a value estimate based on pricing multiples derived from the acquisition of countrol of entire public or private company that were acquired
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prior transaction method (PTM)
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considers actual transactions in the stock of the subject private company
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strategic transaction
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involves a buyer that would benefit from certain synergies associated with owneing the target firm
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financial transaction
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involves a buyer having essentially no material synergies with the target
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P/EBITDA vs EV/EBITDA
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use EV/EBITDA if conflicting results, when coming up with the decision
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normalized EPS
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is based on the method of average ROE
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P/E and risk premium
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is a decreasing funtion, i.e. risk increases P/E decreases
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P/B may be used when
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-company is likely to be liquidated
-composed mainly of liquid assets -company's EPS are highly volatile or negative |
