valuation
Download
Skip this Video
Download Presentation
VALUATION

Loading in 2 Seconds...

play fullscreen
1 / 29

VALUATION - PowerPoint PPT Presentation


  • 184 Views
  • Uploaded on

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

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about ' VALUATION' - saber


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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
five categories of valuation methods
Five Categories of Valuation Methods
  • Discounted cash-flow
  • Market-based
  • Mixed models
  • Asset-based methods
  • Option-based methods
discounted cash flow approach
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
discounted dividend valuation
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
discounted dividend valuation theoretical model
Discounted Dividend ValuationTheoretical Model
  • No-growth, constant dividend
  • Dividends are growing at rate g
discounted dividend valuation required rate of return r
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
capm example
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%
discounted dividend valuation required rate of return r1
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
discounted dividend valuation growth rate g
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
slide10

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%
slide11

Discounted Dividend Valuation- example

  • r = .0475+1.35(.054) = .120
  • g = .13(1-.20) = .104
  • Value = $11.04…
discounted dividend valuation1
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
discounted operating cash flow models
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
discount rate
Discount Rate
  • FCFF
    • Weighted Average Cost of Capital
  • FCFE
    • Cost of Equity (required rate of return)
discounted operating cash flow models other considerations
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
special issues
Special Issues
  • Loss generating firm valuation
  • Closed Firm Valuation
  • Start-up companies
market based models
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
p e model
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
p e model1
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
p e model example
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
mixed models
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
asset based models
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
options based models
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
selecting a model
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
ad