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    Equity Valuation:: Applications and Processes

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    solid9283
    This document discusses equity valuation applications and processes. It covers intrinsic value estimation, discounted cash flow models like dividend discount and free cash flow to equity models, relative valuation models using price ratios, challenges in valuation like analyst and market errors, and uses of valuation like for M&A events and stock selection. The valuation process involves understanding the business, forecasting performance, selecting a model, and applying conclusions. Choice of model depends on company characteristics and available data.

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    Equity Valuation:: Applications and Processes

    Uploaded by

    solid9283
    24 views17 pages
    This document discusses equity valuation applications and processes. It covers intrinsic value estimation, discounted cash flow models like dividend discount and free cash flow to equity models, relative valuation models using price ratios, challenges in valuation like analyst and market errors, and uses of valuation like for M&A events and stock selection. The valuation process involves understanding the business, forecasting performance, selecting a model, and applying conclusions. Choice of model depends on company characteristics and available data.

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    Equity Chapter1 Mod

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    This document discusses equity valuation applications and processes. It covers intrinsic value estimation, discounted cash flow models like dividend discount and free cash flow to equity models, relative valuation models using price ratios, challenges in valuation like analyst and market errors, and uses of valuation like for M&A events and stock selection. The valuation process involves understanding the business, forecasting performance, selecting a model, and applying conclusions. Choice of model depends on company characteristics and available data.

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    Download as pptx, pdf, or txt
    24 views17 pages

    Equity Valuation:: Applications and Processes

    Uploaded by

    solid9283
    This document discusses equity valuation applications and processes. It covers intrinsic value estimation, discounted cash flow models like dividend discount and free cash flow to equity models, relative valuation models using price ratios, challenges in valuation like analyst and market errors, and uses of valuation like for M&A events and stock selection. The valuation process involves understanding the business, forecasting performance, selecting a model, and applying conclusions. Choice of model depends on company characteristics and available data.

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    You are on page 1of 17

    EQUITY VALUATION:

    APPLICATIONS AND PROCESSES

    Presenter
    Venue
    Date
    VALUATION

    Examining
    Values of
    Comparable
    Assets
    Estimating Estimating
    Proceeds Variables
    from Related to
    Immediate Future
    Liquidation Returns

    Value
    Estimate
    INTRINSIC VALUE

    Asset Value Given a


    Complete Understanding of an
    Assets Characteristics

    True or Real Value

    Not Always Equal


    to Market Price
    ESTIMATED VALUE AND MARKET PRICE

    Intrinsic
    Undervalued: value >
    market price

    Intrinsic
    Fairly valued: value =
    market price

    Intrinsic
    Overvalued: value <
    market price
    ASSET MISPRICING

    Efficient Market Theory:

    Intrinsic value = Market price

    VE P = (V P) + (VE V)

    Sources of perceived mispricing


    Market error
    Analyst error
    USES OF EQUITY VALUATION

    Is the stock under- or


    Stock Selection
    overvalued?

    Inferring Market What does the security price say


    Expectations about expectations?

    Evaluating What is the effect on firm value


    Corporate Events from a merger?

    Fairness Is the value paid for the firm


    Opinions fair?
    USES OF EQUITY VALUATION

    Evaluating What is the effect on firm value


    Business
    Strategies of a new strategy?
    Communicating How is firm value being
    with Analysts and
    Shareholders affected?

    Appraising Private What is the value of a private


    Businesses firm?

    What is the value of equity


    Compensation
    compensation?
    THE VALUATION PROCESS

    1. Understanding the Business


    Industry and competitive analysis Financial statement analysis

    2. Forecasting Company Performance


    Forecast sales, earnings, dividends, and financial position

    3. Selecting the Appropriate Valuation Model

    Base selection on company characteristics


    THE VALUATION PROCESS

    4. Using Forecasts in a Valuation


    Use judgment in valuation application

    5. Applying the Valuation Conclusions

    Investment Strategic
    Valuation opinions
    recommendations decisions
    VALUATION MODELS

    Absolute Valuation Relative Valuation


    Models Models
    Present value models Price ratios
    Dividend discount models Price-to-earnings ratio
    Free cash flow to equity Price-to-book-value ratio
    Free cash flow to the firm Price-to-cash-flow ratio
    Residual income Enterprise value multiples
    Asset-based models
    PRESENT VALUE MODELS

    Value of an investment = present


    value of expected future benefits

    Future benefits Future benefits


    = dividends = free cash flow


    Dt FCFEt
    V0 V0
    t 1 (1 r ) t
    t 1 (1 r ) t
    CHOOSING A VALUATION MODEL

    What are the What is the


    characteristics of availability and
    the company? quality of data?

    What is the
    purpose of the
    valuation?
    OTHER VALUATION MODEL ISSUES

    Sum-of-the-Parts Valuation

    Sensitivity Analysis

    Situational Adjustments
    ANALYST ROLES

    Sell-Side Buy-Side
    Analysts Analysts

    Corporate Independent
    Analysts Analysts
    CHOICE OF DISCOUNTED CASH FLOW
    MODELS

    15
    ADVANTAGES AND DISADVANTAGES
    Theoretically appealing and provide
    Present a direct computation of intrinsic value
    Input uncertainty can lead to poor
    value models estimates of value

    Ratios are easy to compute and


    Multiplier analysis is easily understood
    Problems with selecting a peer group
    models or comps

    Consistent with the notion that a


    Asset-based business is worth the sum of its parts
    Difficulties determining market value
    valuation and the value of intangible assets
    CHOICE OF DISCOUNTED CASH FLOW
    MODELS

    Rapidly increasing
    Transition ROE = r
    earnings Earnings and
    Heavy reinvestment Earnings growth dividends growth
    Small or no dividends slows matures
    Capital reinvestment Gordon growth model
    slows useful
    FCFE and dividends

    Growth increasing
    Maturity

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