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Valuation

Valuation. Equity Valuation (Chap 15) Discounted Cash Flow techniques DDM PV OCF PC FCF Relative Valuation techniques P/E P/CF P/BV P/S. Valuation (continue). Bond Valuation (Chap 18 & 19) Annual Semi annual Bond Valuation Principles Price inversely related with interest rate

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Valuation

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  1. Valuation • Equity Valuation (Chap 15) • Discounted Cash Flow techniques • DDM • PV OCF • PC FCF • Relative Valuation techniques • P/E • P/CF • P/BV • P/S

  2. Valuation (continue) • Bond Valuation (Chap 18 & 19) • Annual • Semi annual • Bond Valuation Principles • Price inversely related with interest rate • Coupon rate vs current interest rate and bond prices • Convergence principle • Sensitivity of LT vs ST Bond Prices • Factors affecting price volatility of bonds: maturity vs coupon • Duration as an investment tools.

  3. Equity Valuation • Three general DDM models • No growth • Constant growth • Multiple or super growth model • Exercises • Q 1 to 5 • Q 19 to 21 • DDM and relation to P/E

  4. Dividend discount model (DDM) • Value of a stock is the present value of the future dividends expected to be generated by the stock.

  5. Constant growth stock • A stock whose dividends are expected to grow forever at a constant rate, g. D1 = D0 (1+g)1 D2 = D0 (1+g)2 Dt = D0 (1+g)t • If g is constant, the dividend growth formula converges to:

  6. No growth model • If g = 0 in the constant model, • You have the no growth model • Po = D/Ks

  7. Supernormal growth:What if g = 30% for 3 years before achieving long-run growth of 6%? • Can no longer use just the constant growth model to find stock value. • However, the growth does become constant after 3 years.

  8. Some additional notes • g = retention rate * ROE • Payout = DPS/EPS • Retention rate = 1 – payout. • Ks can also be estimated using CAPM

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