Bài giảng Investment - chapter 18: Equity Valuation Models

CHAPTER 18Equity Valuation ModelsBalance Sheet ModelsBook ValueDividend Discount ModelsPrice/Earning RatiosModels of Equity ValuationTable 18.1 Financial Highlights for Microsoft Corporation, October 25, 2007Limitations of Book ValueBook value is an application of arbitrary accounting rulesCan book value represent a floor value?Better approachesLiquidation valueReplacement costExpected Holding Period ReturnThe return on a stock investment comprises cash dividends and capital gains or lossesAssuming a one-year holding periodRequired ReturnCAPM gave us required return:If the stock is priced correctlyRequired return should equal expected returnIntrinsic ValueSelf assigned ValueVariety of models are used for estimationMarket PriceConsensus value of all potential tradersTrading SignalIV > MP BuyIV < MP Sell or Short SellIV = MP Hold or Fairly PricedIntrinsic Value and Market PricePH = the expected sales price for the stock at time HH = the specified number of years the stock is expected to be heldSpecified Holding PeriodV0 = Value of StockDt = Dividendk = required returnDividend Discount Models: General ModelStocks that have earnings and dividends that are expected to remain constantPreferred StockNo Growth ModelE1 = D1 = $5.00k = .15V0 = $5.00 /.15 = $33.33No Growth Model: Exampleg = constant perpetual growth rate Constant Growth ModelE1 = $5.00 b = 40% k = 15%(1-b) = 60% D1 = $3.00 g = 8%V0 = 3.00 / (.15 - .08) = $42.86Constant Growth Model: Exampleg = growth rate in dividendsROE = Return on Equity for the firmb = plowback or retention percentage rate (1- dividend payout percentage rate)Estimating Dividend Growth RatesFigure 18.1 Dividend Growth for Two Earnings Reinvestment PoliciesPresent Value of Growth OpportunitiesIf the stock price equals its IV, growth rate is sustained, the stock should sell at:If all earnings paid out as dividends, price should be lower (assuming growth opportunities exist)Present Value of Growth Opportunities ContinuedPrice = No-growth value per share + PVGO (present value of growth opportunities)ROE = 20% d = 60% b = 40%E1 = $5.00 D1 = $3.00 k = 15%g = .20 x .40 = .08 or 8%Partitioning Value: ExampleVo = value with growthNGVo = no growth component valuePVGO = Present Value of Growth OpportunitiesPartitioning Value: Example ContinuedLife Cycles and Multistage Growth Modelsg1 = first growth rateg2 = second growth rateT = number of periods of growth at g1Multistage Growth Rate Model: ExampleD0 = $2.00 g1 = 20% g2 = 5% k = 15% T = 3 D1 = 2.40 D2 = 2.88 D3 = 3.46 D4 = 3.63V0 = D1/(1.15) + D2/(1.15)2 + D3/(1.15)3 + D4 / (.15 - .05) ( (1.15)3V0 = 2.09 + 2.18 + 2.27 + 23.86 = $30.40 Table 18.2 Financial Ratios in Two Industries Figure 18.2 Value Line Investment Survey Report on Honda Motor Co.P/E Ratios are a function of two factorsRequired Rates of Return (k)Expected growth in DividendsUsesRelative valuationExtensive Use in industryPrice Earnings RatiosE1 - expected earnings for next yearE1 is equal to D1 under no growthk - required rate of returnP/E Ratio: No Expected Growth b = retention ratio ROE = Return on EquityP/E Ratio: Constant GrowthE0 = $2.50 g = 0 k = 12.5%P0 = D/k = $2.50/.125 = $20.00PE = 1/k = 1/.125 = 8Numerical Example: No Growthb = 60% ROE = 15% (1-b) = 40%E1 = $2.50 (1 + (.6)(.15)) = $2.73D1 = $2.73 (1-.6) = $1.09k = 12.5% g = 9%P0 = 1.09/(.125-.09) = $31.14PE = 31.14/2.73 = 11.4PE = (1 - .60) / (.125 - .09) = 11.4 Numerical Example: GrowthTable 18.3 Effect of ROE and Plowback on Growth and the P/E RatioP/E Ratios and Stock RiskHolding all else equalRiskier stocks will have lower P/E multiplesHigher values of k; therefore, the P/E multiple will be lowerPitfalls in P/E AnalysisUse of accounting earningsEarnings ManagementChoices on GAAPInflationReported earnings fluctuate around the business cycleFigure 18.3 P/E Ratios of the S&P 500 Index and InflationFigure 18.4 Earnings Growth for Two Companies Figure 18.5 Price-Earnings Ratios Figure 18.6 P/E Ratios for Different Industries, 2007Other Comparative Value ApproachesPrice-to-book ratioPrice-to-cash-flow ratioPrice-to-sales ratioFigure 18.7 Market Valuation Statistics Free Cash Flow ApproachDiscount the free cash flow for the firmDiscount rate is the firm’s cost of capitalComponents of free cash flowAfter tax EBITDepreciationCapital expendituresIncrease in net working capitalComparing the Valuation ModelsIn practiceValues from these models may differAnalysts are always forced to make simplifying assumptionsThe Aggregate Stock MarketExplaining Past BehaviorForecasting the Stock MarketFigure 18.8 Earnings Yield of S&P 500 versus 10-Year Treasury-Bond YieldTable 18.4 S&P 500 Price Forecasts Under Various Scenarios