1 / 20

Comprehensive Guide to Equity Valuation Models: Fundamental Stock Analysis Techniques

This chapter delves into the fundamental methods of equity valuation, detailing various models such as balance sheet models, dividend discount models, and price/earning ratios. It explains how to estimate growth rates, intrinsic value, and market price, providing practical examples including no growth and constant growth models. Additional focus is placed on trading signals, the role of required rates of return, and the partitioning of value between growth and no-growth components. This comprehensive guide is essential for those looking to master stock analysis and valuation techniques.

lee-gregory
Télécharger la présentation

Comprehensive Guide to Equity Valuation Models: Fundamental Stock Analysis Techniques

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter13 Equity Valuation

  2. Fundamental Stock Analysis: Models of Equity Valuation • Basic Types of Models • Balance Sheet Models • Dividend Discount Models • Price/Earning Ratios • Estimating Growth Rates and Opportunities

  3. Intrinsic Value and Market Price • Intrinsic Value • Self assigned Value • Variety of models are used for estimation • Market Price • Consensus value of all potential traders • Trading Signal • IV > MP Buy • IV < MP Sell or Short Sell • IV = MP Hold or Fairly Priced

  4. Dividend Discount Models:General Model • V0 = Value of Stock • Dt = Dividend • k = required return

  5. No Growth Model • Stocks that have earnings and dividends that are expected to remain constant • Preferred Stock

  6. No Growth Model: Example E1 = D1 = $5.00 k = .15 V0 = $5.00 / .15 = $33.33

  7. Constant Growth Model • g = constant perpetual growth rate

  8. Constant Growth Model: Example E1 = $5.00 b = 40% k = 15% (1-b) = 60% D1 = $3.00 g = 8% V0 = 3.00 / (.15 - .08) = $42.86

  9. Estimating Dividend Growth Rates • g = growth rate in dividends • ROE = Return on Equity for the firm • b = plowback or retention percentage rate • (1- dividend payout percentage rate)

  10. Shifting Growth Rate Model • g1 = first growth rate • g2 = second growth rate • T = number of periods of growth at g1

  11. Shifting Growth Rate Model: Example D0 = $2.00 g1 = 20% g2 = 5% k = 15% T = 3 D1 = 2.40 D2 = 2.88 D3 = 3.46 D4 = 3.63 V0 = D1/(1.15) + D2/(1.15)2 + D3/(1.15)3 + D4 / (.15 - .05) ( (1.15)3 V0 = 2.09 + 2.18 + 2.27 + 23.86 = $30.40

  12. Specified Holding Period Model • PN = the expected sales price for the stock at time N • N = the specified number of years the stock is expected to be held

  13. Partitioning Value: Growth and No Growth Components • PVGO = Present Value of Growth Opportunities • E1 = Earnings Per Share for period 1

  14. Partitioning Value: Example • ROE = 20% d = 60% b = 40% • E1 = $5.00 D1 = $3.00 k = 15% • g = .20 x .40 = .08 or 8%

  15. Partitioning Value: Example Vo = value with growth NGVo = no growth component value PVGO = Present Value of Growth Opportunities

  16. Price Earnings Ratios • P/E Ratios are a function of two factors • Required Rates of Return (k) • Expected growth in Dividends • Uses • Relative valuation • Extensive Use in industry

  17. P/E Ratio: No expected growth • E1 - expected earnings for next year • E1 is equal to D1 under no growth • k - required rate of return

  18. P/E Ratio with Constant Growth • b = retention ration • ROE = Return on Equity

  19. Numerical Example: No Growth E0 = $2.50 g = 0 k = 12.5% P0 = D/k = $2.50/.125 = $20.00 PE = 1/k = 1/.125 = 8

  20. Numerical Example with Growth b = 60% ROE = 15% (1-b) = 40% E1 = $2.50 (1 + (.6)(.15)) = $2.73 D1 = $2.73 (1-.6) = $1.09 k = 12.5% g = 9% P0 = 1.09/(.125-.09) = $31.14 PE = 31.14/2.73 = 11.4 PE = (1 - .60) / (.125 - .09) = 11.4

More Related