Lecture 6: Fundamental Analysis - Company valuation Flashcards Preview

Security Investment Analysis > Lecture 6: Fundamental Analysis - Company valuation > Flashcards

Flashcards in Lecture 6: Fundamental Analysis - Company valuation Deck (20)
Loading flashcards...
1
Q

2 main approaches of company valuation:

  1. ? valuation
  2. ? valuation
A

2 main approaches of company valuation:

  1. Intrinsic valuation
  2. Relative valuation
2
Q
  1. Intrinsic valuation: ? Cash Flows techniques:
    1. Present value of ? (DDM)
    1. Present value of ? cash flow
    1. Present value of ? cash flow
    1. Present value of free cash flow to ?
A
  1. Intrinsic valuation: Discounted Cash Flows techniques:
    1. Present value of dividends (DDM)
    1. Present value of operating cash flow
    1. Present value of free cash flow
    1. Present value of free cash flow to equity
3
Q
  1. Relative valuation techniques:
    1. Price / ? (P/E) ratio
  2. 2 Price / ? (P/CF) ratio
    1. Price / ? value (P/B) ratio
    1. Price / ? (P/S) ratio
A
  1. Relative valuation techniques:
    1. Price / Earnings (P/E) ratio
  2. 2 Price / Cash flow (P/CF) ratio
    1. Price / Book value (P/B) ratio
    1. Price / Sales (P/S) ratio
4
Q

Supporters of ?? Efficient Market Hypothesis argue that market value reflects intrinsic value.

A

Supporters of Semi-strong Efficient Market Hypothesis argue that market value reflects intrinsic value.

5
Q
  1. General equation of Discounted Cash Flow:
    Intrinsic value = V = sum_t=1^∞ [ ???? ]
    C_t: cashflows (e.g. dividends, free cash flow, ….)
    k: discount rate
A
  1. General equation of Discounted Cash Flow:
    Intrinsic value = V = sum_t=1^∞ [ C_t / (1+k)^t ]
    C_t: cashflows (e.g. dividends, free cash flow, ….)
    k: discount rate
6
Q
--1.1. Constant-growth dividend discount model:
Value of common stock = V0
= ???
g = constant growth rate of dividends
k: required rate of returns
A
--1.1. Constant-growth dividend discount model (DDM):
Value of common stock = V0
= D1 / (k-g)
g = constant growth rate of dividends
k: required rate of returns

(Formula for zero-growth & multiple-growth DDM are in lecture slides)

7
Q

–1.2. Present value of operating cash flow:
V0 = ????

OFC1: operating CF in period 1
WACC: weighted average cost of capital
g_OFC: long-term constant growth of OFC

A

–1.2. Present value of operating cash flow:
V0 = OCF1 / (WACC - g_OFC)

OFC1: operating CF in period 1
WACC: weighted average cost of capital
g_OFC: long-term constant growth of OFC

8
Q

— 1.3-4. formula in lecture slide

A

—1.3-4. formulas in lecture slide

9
Q
  1. DCF: Pros & Cons:
    - ? appealing
    But:
    - require ? of discount rates & ? of growth rate
A
  1. DCF: Pros & Cons:
    - theoretically appealing
    But:
    - require estimates of discount rates & forecasts of growth rate
10
Q
  1. Relative valuation - Problems:
    - Finding ?:
    e. g. if we compare an overvalued firm to a hugely overvalued one, we may think it’s undervalued.
    - Many relative valuation metrics are based on ? (not current) data: e.g. P/E
A
  1. Relative valuation - Problems:
    - Finding comparables:
    e. g. if we compare an overvalued firm to a hugely overvalued one, we may think it’s undervalued.
    - Many relative valuation metrics are based on historical data, not current one: e.g. P/E
11
Q

2.1. RV - Earnings Multiplier model (P/E ratio):
= Current ?? / Expected 12-month ?

Pi / E1 = ????

D/E = expected ?? ratio
k = estimated required rate of return
g = expected growth rate of dividends
A

2.1. RV - Earnings Multiplier model (P/E ratio):
= Current Market Price / Expected 12-month earnings

Pi / E1 = (D1 / E1) / (k - g)

D/E = expected dividend payout ratio
k = estimated required rate of return
g = expected growth rate of dividends
12
Q

2.1. RV - P/E:
- Analysts usually compare P/E ratio across ‘?’ firms
> but it’s inevitably ? how ‘comparable’ is defined.
- Analysts could also use PEG ratio (??) (g = expected growth in ??):
PE ? g: (usually but not necessarily (e.g. if firm is high risk) ) undervalued
PE ? g: overvalued

A

2.1. RV - P/E:
- Analysts usually compare P/E ratio across ‘comparable ‘ firms
> but it’s inevitably subjective how ‘comparable’ is defined.
- Analysts could also use PEG ratio (PE/g) (g = expected growth in future earnings):
PE < g: (usually but not necessarily (e.g. if firm is high risk) ) undervalued
PE > g: overvalued

13
Q
    1. RV - Issues of PE ratio in real world:
      - Use of ?? (which may have been ? to the benefit of t’ firm)
      - ? may need to be taken into account
      - Reported earnings actually fluctuate around ??.
      - PE ratio is derived based on fundamentals of ???
      - differ from figures reported in newspapers & online that is ????? (ignore ???)
A
    1. RV - Issues of PE ratio in real world:
      - Use of accounting earnings (which may have been manipulated to the benefit of t’ firm)
      - Inflation may need to be taken into account
      - Reported earnings actually fluctuate around business cycle.
      - PE ratio is derived based on fundamentals of DDM
      - differ from figures reported in newspapers & online that is current price / most recent EPS (ignore future earning growth)
14
Q
    1. RV - P/E:
      - Value stocks : ? P/E ratio
      - Growth stocks: ? P/E ratio
A
    1. RV - P/E:
      - Value stocks : low P/E ratio
      - Growth stocks: high P/E ratio
15
Q

2.2. RV - P/CF:
- Firms can use accounting techniques to manipulate ?.
- Cash flow is less prone to manipulation & is important for fundamental valuation & in credit analysis:
P / CFi = ???

CF_(t+1) = expected cash flow per share

A

2.2. RV - Price to Cash Flow:
- Firms can use accounting techniques to manipulate earnings.
- Cash flow is less prone to manipulation & is important for fundamental valuation & in credit analysis:
P / CFi = Pt / CF_(t+1)
CF_(t+1) = expected cash flow per share

16
Q

–(less important) 2.3. RV - P/B ratio:
P / BVj = Pt / BV_(t+1)

BV_(t+1) = estimated end of year book value per share

? P/B ratio: lower excess returns
- widely used to measure bank values

A

– 2.3. RV - Price to Book ratio:
P / BVj = Pt / BV_(t+1)

Pt = end of year stock price
BV_(t+1) = estimated end of year book value per share

High P/B ratio: lower excess returns
- widely used to measure bank values

17
Q

–2.4. RV - Price to ? ratio:
Pj / Sj = Pt / S_(t+1)

Pt = end of year stock price
S_(t+1) = annual sales per share 
  • strong consistent growth in sales is a requirement for ? companies.
A

–2.4. RV - Price to Sales ratio:
Pj / Sj = Pt / S_(t+1)

Pt = end of year stock price
S_(t+1) = annual sales per share 
  • strong consistent growth in sales is a requirement for growth companies.
18
Q

2.5. RV - Return on capital: measure of ? with which assets are employed to generate income

  • Return on ? (ROE): how much earnings firms can generate from $1 of equity capital invested:
    ROE = ???
  • Return on ?? (ROCE): Return of capital of equity & debt investors:
    ROCE = ???
A

2.5. RV - Return on capital: measure of efficiency with which assets are employed to generate income

  • Return on Equity (ROE): how much earnings firms can generate from $1 of equity capital invested:
    ROE = Profit after tax_(t+1) / Shareholders’ equity_t
  • Return on Capital employed (ROCE): Return of capital of equity & debt investors:
    ROCE = Operating profit_(t+1) / Capital employed_t
19
Q
  1. Implement RV:

- compare relative valuation ratio of a company to that of t’ market/ industry/ other firms in t’ industry

A
  1. Implement RV:

- compare relative valuation ratio of a company to that of t’ market/ industry/ other firms in t’ industry

20
Q
  1. RV - Empirical evidence:
    - Basu (1977): ? PE stocks offer higher returns
    - Fama & French (1996): returns are affected by ? & ? ratio.
A
  1. RV - Empirical evidence:
    - Basu (1977): low PE stocks offer higher returns
    - Fama & French (1996): returns are affected by size & BM ratio.