Tài chính doanh nghiệp - Chapter 18: Equity valuation models

Chapter 18Equity Valuation ModelsBasic Types of ModelsBalance Sheet ModelsDividend Discount ModelsPrice/Earning RatiosEstimating Growth Rates and OpportunitiesModels of Equity ValuationIntrinsic ValueSelf assigned ValueVariety of models are used for estimationMarket PriceConsensus value of all potential tradersTrading SignalIV > MP BuyIV < MP Sell or Short SellIV = MP Hold or Fairly PricedIntrinsic Value and Market PriceV0 = Value of StockDt = Dividendk = required returnDividend Discount Models: General ModelStocks that have earnings and dividends that are expected to remain constant.Preferred StockNo Growth ModelE1 = D1 = $5.00k = .15V0 = $5.00 / .15 = $33.33No Growth Model: Exampleg = constant perpetual growth rate Constant Growth ModelE1 = $5.00 b = 40% k = 15%(1-b) = 60% D1 = $3.00 g = 8%V0 = 3.00 / (.15 - .08) = $42.86Constant Growth Model: Exampleg = growth rate in dividendsROE = Return on Equity for the firmb = plowback or retention percentage rate (1- dividend payout percentage rate)Estimating Dividend Growth RatesPN = the expected sales price for the stock at time NN = the specified number of years the stock is expected to be heldSpecified Holding Period ModelPVGO = Present Value of Growth OpportunitiesE1 = Earnings Per Share for period 1Growth & No Growth Components of ValueROE = 20% d = 60% b = 40%E1 = $5.00 D1 = $3.00 k = 15%g = .20 x .40 = .08 or 8%Partitioning Value: ExampleVo = value with growthNGVo = no growth component valuePVGO = Present Value of Growth OpportunitiesPartitioning Value: ExampleP/E Ratios are a function of two factorsRequired Rates of Return (k)Expected growth in DividendsUsesRelative valuationExtensive Use in industryPrice Earnings RatiosE1 - expected earnings for next yearE1 is equal to D1 under no growthk - required rate of returnP/E Ratio: No Expected Growth b = retention ratio ROE = Return on EquityP/E Ratio with Constant GrowthE0 = $2.50 g = 0 k = 12.5%P0 = D/k = $2.50/.125 = $20.00PE = 1/k = 1/.125 = 8Numerical Example: No Growthb = 60% ROE = 15% (1-b) = 40%E1 = $2.50 (1 + (.6)(.15)) = $2.73D1 = $2.73 (1-.6) = $1.09k = 12.5% g = 9%P0 = 1.09/(.125-.09) = $31.14PE = 31.14/2.73 = 11.4PE = (1 - .60) / (.125 - .09) = 11.4 Numerical Example with GrowthPitfalls in P/E AnalysisUse of accounting earningsHistorical costsMay not reflect economic earningsReported earnings fluctuate around the business cycle.Other Valuation RatiosPrice-to-BookPrice-to-Cash FlowPrice-to-SalesInflation and Equity ValuationInflation has an impact on equity valuations.Historical costs underestimate economic costs.Empirical research shows that inflation has an adverse effect on equity values.Research shows that real rates of return are lower with high rates of inflation.Lower Equity Values with InflationShocks cause expectation of lower earnings by market participants.Returns are viewed as being riskier with higher rates of inflation.Real dividends are lower because of taxes.