Equity

Front 1

General Steps in the equity valuation process

Back 1

1. Understand the business
2. Forecast company performance
3. Select appropriate valuation model
4. Convert Forecasts into a valuation
5. Apply valuation conclusion

Front 2

Types of valuation model

Back 2

a. Using a model based on the variables the analyst believes influence fundamental value of an asset
b. Compare observable market value of similar asset

Front 3

Use of Equity Valuation

Back 3

1. Stock selection
2. Reading the market
3. Projecting value of corporate actions
4. Issuing fairness reports
5. Planning and consulting
6. Communication with analysts and investors
7. Valuation of private businesses

Front 4

3 Generic strategies a company may employ to generate profits

Back 4

1. Cost leadership
2. Product differentiation
3. Focus

Front 5

Fama French Model

Back 5

Multifactor model that attempts to explain higher returns associated with small cap stocks.

Rj= Rf+ Bm,j(Rm-Rf)+ Bs,j(Rs-Rb)+ Bhmb(Rhbm-Rlbm)

Front 6

Pastor Stambaugh Model

Back 6

Adds liquidity factor to fama french.
Baseline= 0 less liquid would be a positive number and more liquid would be a negative number

Front 7

FCFE

Back 7

Cash available to stockholders after all expenses and funding requirements

Front 8

FCFE Models (Appropriate)

Back 8

Firms that do not have a dividend or it is not related to earnings
- Controlling shareholder
- Firms w/ FCF corresponds with their profitability.

Front 9

Single stage DDM

Back 9

Vo= D1+P1/ (1+r)

Front 10

DDM Models

Back 10

a. Gordon (constant) growth
b. Two stage growth model
c. H model
d. 3 stage growth model

Front 11

GGM

Back 11

Do*(1+g)/r-g
= Assumes that growth rate is less than required return on equity

Front 12

Two central questions provide basis for firm's choice of competitive strategy

Back 12

1. Industry Attractiveness
2. Competitive Advantage

Front 13

Steps in using porters five forces in industry analysis

Back 13

1. Define the industry
2. Identify the participants
3. Determine strength or weakness of each force.
4. Determine industry structure using an analytical framework.
5. Assess current and potential shifts in each force.
6. Decide which forces can be altered in ways that will affect the value of the industry or firm.

Front 14

Dividend Discount Model Advantages and Disadvantages

Back 14

A= Theoretically justified, less volatile
D= Difficult for firms that don't have dividends. Could theoretically project them out. Prospective of minority shareholder and don't dictate dividend policy.

Front 15

When to use dividend discount model

Back 15

Company has a history of dividend payments
- Dividend policy is clear and related to earnings
- Prospective is that of a minority shareholder.
- Usually mature firms

Front 16

Macro Multifactor Model

Back 16

(burmeister, roll and ross) Incorporates 5 factors
- Confidence Risk: Unexpected change in in difference between risky corporates and treasuries
- Time Horizone Risk: changes in yield curve
- Inflation risk
- Business cycle risk
- Market timing risk: equity market return that is not explained by other factors

Front 17

Build up method

Back 17

closely held companies where betas are not readily available
Re= Rf+ ERP+ size premium + specific company premium

Front 18

Bond yield + risk premium

Back 18

build up method which is appropriate for companies with publicly traded debt simply adds a risk premium to companys publicly traded debt usually between 3-5%

Front 19

Adjusted beta

Back 19

(2/3 regression beta)+ (1/3)(1)

Front 20

beta estimates for thinly traded and non-public companies

Back 20

1. Identify a benchmark company publicly traded and similar
2. Estimate beta of that company this can be done with a regression
3. Unlever the beta estimate

Unlevered B1= BL* (1/ (1+d1/e1)
4. Estimate B2= (unlevered B1)(1+d2/e2)

Front 21

Porters Five Forces

Back 21

1. Threat of new entrants in the industry
2. Threat of substitutes
3. Bargaining power or buyers
4. Bargaining power of suppliers
5. Rivalry among existing competitors

Front 22

Factors that affect industry in the short term bu not the long term

Back 22

1. Industry growth rates
2. Innovation and technology
3. Government Policies
4. Complementary products

Front 23

Equity value

Back 23

FCFE discounted at required return on equity
- Equity value = firm value - debt
-ownership persepctive is a control perspecitve

Front 24

Why analysts prefer FCF to dividend

Back 24

1. Many firms pay no or low cash dividends
2. Dividends are paid at the discretion of the BOD
3. If a company is an acquisition target may be more appropriate measure
4. FCF may be more related to long term profitability

Front 25

FCFF from NI

Back 25

FCFF= NI+NCC+ (int(1-tr))- FCinv- WCinv

Front 26

NCC

Back 26

- Amortization of intangibles should be added

Front 27

FCinv

Back 27

Capital expenditure - proceeds from sales of long term assets
FCinv= Capex= ending gross ppe- beg gross ppe
FCinv= ending net ppe- beginning net ppe + dep.

Front 28

WCinv

Back 28

change in nwc excluding cash, cash equivalents, notes payable, current portion of LTD

Front 29

FCFE--> FCFF

Back 29

FCFE= FCFF - int.(1-tr) + net borrowing

Front 30

EBIT--> FCFF

Back 30

ebit(1-tr)+ dep. - FCinv- WCinv