Equity Valuation Lecture Map Definitions of Value Book value‚ Liquidation value‚ Intrinsic value‚ Market value Dividend discount models Constant-growth Multi-stage growth Value Metrics and Determinants of Value Current earnings and growth P/E Lesmond 1 Book Value of Equity The firm’s equity value‚ or stock value‚ is stated right on the firm’s books This is NOT the market value of equity Book value per share of Equity is the value of common equity on the books‚ divided
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CAPM is a model which enables investors to determine the expected return from a risky security. It observes the relationship between the risk of an asset (Mobil Oil) and its return. The model uses Beta as the main measure of risk. This model works under the following situations: • In a perfectively competitive market where they are many price-takers’ investors‚ who have a small market share each. • Investors behaviour is myopic • Also investments included in the model are publicly
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Deriving the Dividend Discount Model in the Intermediate Microeconomics Class Stephen Norman Jonathan Schlaudraff Karianne White Douglas Wills* May 2012 Abstract This paper shows that the dividend discount model can be derived using the basic intertemporal consumption model that is introduced in a typical intermediate microeconomic course. This result will be of use to instructors who teach microeconomics to finance students in that it demonstrates the value of utility maximization in obtaining
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1 Factor Models The Markowitz mean-variance framework requires having access to many parameters: If there are n risky assets‚ with rates of return ri ‚ i = 1‚ 2‚ . . . ‚ n‚ then we must know 2 all the n means (ri )‚ n variances (σi ) and n(n − 1)/2 covariances (σij ) for a total of 2n + n(n − 1)/2 parameters. If for example n = 100 we would need 4750 parameters‚ and if n = 1000 we would need 501‚ 500 parameters! At best we could try to estimate these‚ but how? In fact‚ it is easy to see
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Evaluation Calculation Discursive 20% 80% Question 2 Dividend Valuation Model 45% 55% Question 3 Option strategies Straddles 80% 20% Question 4 Duration and convexity –Price – yield relationship 30% 70% Question 5 Option and Futures -mixed N/A 100% Question 6 CAPM 40% 60% Dividend Discount Models 1. The intrinsic value‚ denoted V0‚ of a share of stock is defined as the present value of all cash payments to the investor in the stock‚ including dividends as well as the proceeds from the ultimate sale
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The Capital Asset Pricing Model commonly known as CAPM defines the relationship between risk and the return for individual securities. CAPM was first published by William Sharpe in 1964. CAPM extended “Harry Markowitz’s portfolio theory” to include the notions of specific and systematic risk. CAPM is a very useful tool that has enabled financial analysts or the independent investors to evaluate the risk of a specific investment while at the same time setting a specific rate of return with respect
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Dividend discount model Dividend discount model (DDM) is a way of valuing a share based on the net present value of the dividends that you expect to receive in the future. According to the DDM‚ dividends are the cash flows that are returned to the shareholder. FY 2002 2003 2004 2005 2006 2007F 2008F 2009F Share price 0.155 0.150 0.230 0.370 0.450 0.450 Dividends per share 0.005 0.012 0.014 0.012 0.013 0.019 0.0178 0.020 Dividend Growth 0.0833 0.258 0.014 0.014 Dividend rates
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The dividend growth model approach limited application in practice because of its two assumptions. It assumes that the dividend per share will grow at a constant rate‚ g‚ forever The expected dividend growth rate‚ g‚ should be less than the cost of equity‚ Ke‚ to arrive at the simple growth formula. The growth formula is‚ Ke = (DIV1 / Po) + g These assumptions imply that the dividend growth approach cannot be applied to those companies‚ which are not paying any dividends‚ or whose dividend
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2 MODELS FOR THE VALUATION OF SHARES. 2.1 The concept of a cost of equity The cost of equity is the cost to the company of providing equity holders with the return they require on their investment. The primary financial objective is to maximize the return to equity shareholders. This return is as the future dividend yield and capital growth. Until new shareholders become members of the company‚ the objective above is concerned with existing shareholders. Company management will need to offer
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EQUITY VALUATION MODELS Equity Valuation -Determining the total value of a company involves more than reviewing assets and revenue figures. An equity valuation takes several financial indicators into account; these include both tangible and intangible assets‚ and provide prospective investors‚ creditors or shareholders with an accurate perspective of the true value of a company at any given time Significance of Equity Valuation Model -Equity valuations are conducted to measure the value of
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