1 / 29


VALUATION. Five Categories of Valuation Methods. Discounted cash-flow Market-based Mixed models Asset-based methods Option-based methods. Discounted Cash-Flow Approach. Estimated future cash flows are discounted back to present value based on the investor’s required rate of return

Télécharger la présentation


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.


Presentation Transcript


  2. Five Categories of Valuation Methods • Discounted cash-flow • Market-based • Mixed models • Asset-based methods • Option-based methods

  3. Discounted Cash-Flow Approach • Estimated future cash flows are discounted back to present value based on the investor’s required rate of return • Discounted dividend valuation • Discounted operating cash-flow models

  4. Discounted Dividend Valuation • Most straightforward approach • Explicit cash flows received by equity investors • Dividends • Terminal value when shares are sold • Firm is expected to have an infinite life

  5. Discounted Dividend ValuationTheoretical Model • No-growth, constant dividend • Dividends are growing at rate g

  6. Discounted Dividend ValuationRequired rate of return (r) • r is the rate of return demanded on a specific investment • Based on investor’s assessment of risk • CAPM

  7. CAPM -- Example • rf, Risk-free (30-year Treasury bond) = 5% • rm, Expected stock market return = 10% • Risk premium = (rm – rf) • Beta = 1.5 • r = 5% + 1.5(10%-5%) • r = 12.5%

  8. Discounted Dividend ValuationRequired rate of return (r) • For nonpublic companies, use a buildup model and historical sources for data • Begin with risk-free rate • + Equity risk premium • + Small company premium • + Company specific risk premium • = Required rate of return

  9. Discounted Dividend ValuationGrowth rate (g) • Top-Down analysis • Begin with growth of economy • Adjust for industry, sector and company factors • Sustainable growth = ROE(1-Payout rate) • ROE = Earnings/Average equity • Payout rate: proportion of earnings used to pay dividends or repurchase shares

  10. Discounted Dividend Valuation- example • Company A • Annual dividend = $0.16 • Beta = 1.35 • ROE = 13% • Payout ratio = 20% • Economic • 20-year Treasury bond = 4.75% • Historical market risk premium = 5.4%

  11. Discounted Dividend Valuation- example • r = .0475+1.35(.054) = .120 • g = .13(1-.20) = .104 • Value = $11.04…

  12. Discounted Dividend Valuation • Assumes a single, constant growth rate (g) • What if growth rates differ? • Use a multi-stage model to calculate future dividends • Calculate future stock value based on future dividend • Calculate present value of stock and dividends

  13. Discounted Operating Cash-Flow Models • Most applicable in the event of a takeover • Free cash flow (FCF) is operating cash flows less necessary investments in working capital and property, plant and equipment

  14. FCFF or FCFE

  15. Discount Rate • FCFF • Weighted Average Cost of Capital • FCFE • Cost of Equity (required rate of return)

  16. Discounted Operating Cash-Flow ModelsOther considerations • Growth • Can use a multi-stage model to accommodate rate changes • Forecasting cash flows requires judgment • Begin with reported, historical cash flow and earnings • Make company-appropriate adjustments

  17. Special Issues • Loss generating firm valuation • Closed Firm Valuation • Start-up companies

  18. Valuation Of GAP Retail Stores

  19. FCFF-Stable Growth

  20. Market-based Models • Compare subject company to other similar companies for which market prices are available • Simple computations but require a great deal of professional judgment • P/E Model • P/B Method • P/S Model

  21. P/E Model • Assumes a company is worth a certain multiple of its current earnings • Assumes each share is worth the same multiple of EPS • Derived from the dividend discount models • Requires judgment regarding • Peer firms and their prices • Historical (average) data

  22. P/E Model • Firms with no internal growth prospects, paying out 100% of earnings • Current P/E = 1/r • Constant growth, Leading P/E • P0/E1 = (D1/E1)/(r-g) • D = annual dividends, E = EPS

  23. P/E Model - Example • Consensus analyst forecast EPS = $0.46 • P/E of 23 is appropriate • Value = 23*$0.46 = $10.58 • If the current price is $10.22, there is limited upside to this investment

  24. Mixed Models • Because the previous models are linked (discounted dividend model) a combined approach can be used • May use discounted cash flow approach to forecast cash flows then use market multiple to derive terminal value • Residual income approaches are linked to the dividend discount model

  25. Asset-Based Models • Used when a company is going to be liquidated • Valuation is based on underlying assets • Market value of balance sheet items • Assets and liabilities • Also called cost or adjusted book value approach

  26. Options-Based Models • Theoretically elegant but practical application is difficult • Analyst must have information about opportunities (and their value) available to a firm • Equity ownership is viewed as an option call on the firm • Limited downside, unlimited upside

  27. Selecting a Model • Consider characteristics of the firm • Dividend paying • Growing • Likely to be liquidated • Consider data availability of data • Publicly available or closely held

More Related