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Chapter 10 Equity Valuation: Concepts and Basic Tools

Chapter 10 Equity Valuation: Concepts and Basic Tools. Presenter Venue Date. Estimated Value and Market Price. Dealing with Uncertainty. Major Categories of Equity Valuation Models. Present Value Models. Preferred Stock Valuation (Non-callable, Non-convertible Shares).

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Chapter 10 Equity Valuation: Concepts and Basic Tools

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  1. Chapter 10 Equity Valuation: Concepts and Basic Tools Presenter Venue Date

  2. Estimated Value and Market Price

  3. Dealing with Uncertainty

  4. Major Categories of Equity Valuation Models

  5. Present Value Models

  6. Preferred Stock Valuation (Non-callable, Non-convertible Shares)

  7. The Effect of Options on the Price of a Preferred Share

  8. The Gordon Growth Model • Assumptions: • Dividends are the correct metric to use for valuation purposes. • The dividend growth rate is forever: It is perpetual and never changes. • The required rate of return is also constant over time. • The dividend growth rate is strictly less than the required rate of return.

  9. When Is the Gordon Growth Model Most Appropriate for Valuing Equity?

  10. Estimating a Long-Term Growth Rate

  11. Multistage Dividend Discount Model

  12. The Two-Stage Dividend Discount Model Dividends grow at rate gSfor n years and rate gL thereafter:

  13. The Two-Stage Dividend Discount Model(continued from previous slide)

  14. Price Multiples

  15. Popular Price Multiples

  16. Price Multiples for Telefónica and Deutsche Telekom Sources: Company websites: www.telefonica.es and www.deutschetelekom.com.

  17. Justified Value of a Multiple

  18. Justified Forward P/E for Nestlé Required Rate of Return = 12 percent

  19. The Method of Comparables

  20. Price-to-Sales Ratio Data for Major Automobile Manufacturers (2009)

  21. P/E Data for Canon Sources: EPS and P/E data are from Canon’s website: www.canon.com. P/E is based on share price data from the Tokyo Stock Exchange.

  22. Enterprise Value Multiples

  23. EV/Operating Income Data for Nine Major Mining Companies Source: www.miningnerds.com

  24. Asset-Based Valuation

  25. Asset-Based Valuations: Potential Problems

  26. Asset-Based Valuation versus Discounted Present Value Approaches

  27. Advantages and Disadvantages

  28. Summary • Overvalued, fairly valued, or undervalued securities • Major categories of equity valuation models • Present value models: dividend discount models and free cash flow models • Multiplier models: price ratios and enterprise value ratios • Asset-based valuation • Advantages and disadvantages of equity valuation models

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