Investment Analysis and Portfolio Management First Canadian Edition By Reilly, Brown, Hedges, Chang. 9. Chapter 9 Company Analysis & Stock Valuation. Company Analysis versus Stock Valuation Economic, Industry, and Structural Links to Company Analysis Company Analysis
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Investment Analysis and Portfolio Management
First Canadian Edition
By Reilly, Brown, Hedges, Chang
9
Chapter 9Company Analysis & Stock Valuation
Continued…
Chapter 9Company Analysis & Stock Valuation
Continued…
Strengths
Weaknesses
Weaknesses result when competitors have potentially exploitable advantages over the firm
Opportunities
Threats
They are environmental factors that can hinder the firm in achieving its goals
Examples would include a slowing domestic economy, additional government regulation, an increase in industry competition, threats of entry, etc
Business Tenets
Managerial Tenets
Is management rational?
Is management candid with its shareholders?
Does management resist the institutional imperative?
Financial Tenets
Market Tenets
What is the value of the business?
Can the business be purchased at a significant discount to its fundamental intrinsic value?
Intrinsic Value = D1/(kg) and D1= D0(1+g)
g = RR X ROE
FCFF =EBIT (1Tax Rate)
+ Depreciation Expense
 Capital Spending
 in Working Capital
 in other assets
where: FCFF1 = the free cash flow in period 1
OFCF1 = the firm’s operating free cash flow in period 1
WACC = the firm’s weighted average cost of capital
gFCFF = the constant growth rate of free cash flow
gOFCF = the constant growth rate of operating free cash flow
Operating Free Cash Flow
Free Cash Flow to Equity
FCFE =Net Income
+ Depreciation Exp.
 Capital Expenditures
 D in Working Capital
 Principal Debt Repayment
+ New Debt Issues
FCFF =EBIT (1Tax Rate)
+ Depreciation Exp.
 Capital Spending
 in Working Capital
 in other assets
( Equity
)

E
1
b
E
=
=
V
k
k
E
=
k
V
Value of NoGrowth FirmsbEmk Equity
bEm
=
2
k
k
bEm
bE

k
k
LongRun Growth Models Equity
E
bE
(m
1)
=
+
V
k
k
LongRun Growth Models Equity
E
bE
(m
1)
=
+
V
k
k
Alternative Growth ModelsbEm / k
D Equity
=
1
V

k
g
Alternative Growth Models Equity
R
k
=
´
G
rk
Measures of Value AddedFranchise P/E = Observed P/E  Base P/E
= Franchise Factor X Growth Factor
where R= the expected return on the new opportunities
k=the current cost of equity
r = the current ROE on investment
G= the PV of the new growth projects relative to the current value of the firm