equity valuation

Question 1

residual claimants

Answer 1

stockholders - the value of equity after using the assets to pay off all other claimants (liabilities)

Question 2

how to value asset and liability

Answer 2

through book values

Question 3

book value

Answer 3

the sum of the amounts of all the line items in the shareholders’ equity section on a company’s balance sheet

Question 4

market value

Answer 4

the value of a firm as a going concern - seldom = to book values - based on observed share prices and number of outstanding shares, reflects a consensus of the market (all market participants) regarding dividend estimates , future prices, discount and growth rates

Question 5

liquidation value

Answer 5

the net value of a company’s physical assets if it were to go out of business and the assets sold - better measure of market value

Question 6

replacement cost

Answer 6

the value the business converges to - referring to the amount of money a business must currently spend to replace an essential asset like a real estate property, an investment security, a lien, or another item, with one of the same or higher value

Question 7

Tobin’s Q

Answer 7

market price/replacement cost

Question 8

intrinsic value

Answer 8

value from the perspective of specific investors depending on the information they have, reflects the outcome on fundamental analysis. V = PV(Div) + PV(selling price) @ risk adjusted ratee

Question 9

value investing

Answer 9

finding business for which intrinsic value > market price

Question 10

discounted free cash flow model - DCF

Answer 10

shareholders own a share of equity of the firm - value of equity is teh expected PV of all future cash earnings less all incurred liabilities

Question 11

dividend discount model

Answer 11

value of a share of equity is equal to rpesent value of all future dividends

Question 12

dividend payout ratio

Answer 12

d = expected portion of earnings that will be paid out as dividend, D = d x earnings

Question 13

plowback/retention/reinvestment ratio

Answer 13

b = expected portion of earnings that are retained and reinvested,
Investment Inv = b x earnings

b+d = 1

Question 14

ROE

Answer 14

return on reinvested earnings, cna be different frmo the required cost of caiptal

Question 15

market capitalisation rate

Answer 15

market consensus of required rate of return - can be presented as the sum of dividend yield and capital gains rate

Question 16

constant dividends

Answer 16

if dividends are constant then they should all be equal to the last dividend

Question 17

growing dividends

Answer 17

Gordon growth model

Question 18

growth opportunities

Answer 18

growth in earnings depends on plowback ratio, b and ROE g = b x ROE,
if b = 1 next few dividends = 0 but share price may still increase

for growth:
ROE>R
g < R

Question 19

PVGO present value of growth opportunities

Answer 19

P0 = no growth value per share + PVGO

Question 20

dividends throughout business life cycle

Answer 20

startups - most of the value placed on future growth opportunities
consolidation
mature business
decline

growth rates and dividend payout ratios change throughout business life cycle

Question 21

valuation ratios

Answer 21

Price - dividend ratio

price - earnings ratio - might reflect expected growth

price - book ratio (how aggressively the market values the firm)

price-sales ratio - for startups

Question 22

pitfalls of P/E analysis

Answer 22

earnings are an accounting result
depreciation and inventory use historical cost
inverse relation to inflation - earnings of lower quality in high inflation
can be easily manipulated (managed) too much discretion in rules.

relation to business cycle - fluctuation rather than smooth rise - P/E ratio moves in opposiet direction to deviation in earnings

difficulty in predicting earnings (forward P/E ratios)

Question 23

cyclically adjusted P/E model

Answer 23

adjusting the ratio to the different phases of the business cycle, divide stock price by an estimate of the sustainable long-term earnings (and not current earnings) –> average inflation adjusted earnings over an extended period (10 years)

Question 24

multiples valuation

Answer 24

intrinsic value of the company using P/E ratio as a benchmark Vi = Ei x P/E