Analysis of Equity Investments: Valuation

Contents......Page 10
Preface......Page 4
Acknowledgements......Page 6
About The Authors......Page 8
Foreword......Page 13
Learning Outcomes......Page 20
1 Introduction......Page 21
2 The scope of Equity Valuation......Page 22
2.1 Valuation and Portfolio Management......Page 24
3.2 Understanding the Business......Page 25
3.3 Forecasting Company Performance......Page 27
3.3.1 Economic Forecasting......Page 28
3.3.2.1 Using Accounting Information......Page 29
3.4.1.1 Intrinsic Value......Page 33
3.4.1.2 Other Value of Measures......Page 36
3.4.2 Absolute Valuation Models......Page 37
3.4.3 Relative Valuation Models......Page 38
3.4.4 Issues in Model Selection and Interpretation......Page 40
4 Performing Valuations: The Analyst's Role and Responsibilities......Page 41
5.1 Contents of A Research Report......Page 43
5.3 Research Reporting Responsibilities......Page 46
6 Summary......Page 47
Problems......Page 50
Solutions......Page 53
Learning Outcomes......Page 56
1 Introduction......Page 58
2.1 Valuation Based on The Present Value of Future Cash Flows......Page 59
2.2 Streams of Expected Cash Flows......Page 61
2.3 Discount Rate Determination......Page 66
3 The Dividend Discount Model......Page 74
3.1 The Expression For A Single Holding Period......Page 75
3.2 The Expression For Multiple Holding Period......Page 76
4 The Gordon Growth Model......Page 78
4.1 The Gordon Growth Model Equation......Page 79
4.3 Estimating The Expected Rate of Return With The Gordon Growth Model......Page 85
4.4 The Present Value of Growth Opportunities......Page 87
4.5 Gordon Growth Model and The Price-Earning Ratio......Page 88
5 Multistage Dividend Discount Models......Page 90
5.1 Two-Stage Dividend Discount Model......Page 91
5.2 Valuing A Non-Dividend-Paying Company (First-Stage Dividend = 0)......Page 94
5.3 The H-Model......Page 95
5.4 Three-Stage Dividend Discount Models......Page 96
5.5 Spreadsheet Modeling......Page 99
5.6 Finding Rates of Return For Any DDM......Page 100
5.7 Strengths and Weaknesses of Multistage DDMs......Page 101
6.1 Sustainable Growth Rate......Page 102
6.2 Dividend Growth Rate, Retention Rate, and ROE Analysis......Page 104
6.3 Financial Models and Dividends......Page 107
6.4 Investment Management And DDMs......Page 108
7 Summary......Page 110
Problems......Page 114
Solutions......Page 122
Learning Outcomes......Page 132
1 Introduction To Free Cash Flows......Page 133
2.1 Defining Free Cash Flow......Page 134
2.2.1 Present Value of FCFF......Page 135
2.3 Single-Stage FCFF and FCFE Growth Models......Page 136
2.3.2 Constant-Growth FCFE Valuation Model......Page 137
3.1 Computing FCFE from Net Income......Page 138
3.2 Computing FCFF from The Statement of Cash Flow......Page 141
3.3 Noncash Charges......Page 143
3.4 Computing FCFE from FCFF......Page 147
3.5 Finding FCFF and FCFE from EBIT or EBITDA......Page 151
3.6 Forecasting FCFF and FCFE......Page 153
3.7.2 Free Cash Flow Versus Dividends and Other Earnings Components......Page 157
3.7.3 Free Cash Flow and More-Complicated Capital Structures......Page 160
4.1 An International Application of The Single-Stage Model......Page 162
4.2 Sensitivity Analysis of FCFF and FCFE Valuations......Page 163
4.3 Two-Stage Free Cash Flow Models......Page 165
4.3.1 Fixed Growth Rates in Stage 1 and Stage 2......Page 166
4.3.2 Declining Growth Rates in Stage 1 and Constant Growth in Stage 2......Page 167
4.4 Three-Stage Growth Models......Page 171
6 Summary......Page 173
Problems......Page 176
Solutions......Page 185
Learning Outcomes......Page 198
1 Introduction......Page 199
2 Price Multiples in Valuation......Page 200
3 Price to Earnings......Page 202
3.1 Determining Earnings......Page 203
3.1.1 Calculating the Trailing P/E......Page 204
3.1.2 Calculating A Leading P/E......Page 208
3.2 Valuation Based on Forecasted Fundamentals......Page 211
3.3 Valuation Using Comparables......Page 213
3.3.1 Peer Company Multiples......Page 215
3.3.3 Overall Market Multiple......Page 219
3.3.4 Own Historical P/E Comparisons......Page 223
3.3.5 Using P/Es to Obtain Terminal Value in Multistage Dividend Discount Models......Page 224
4 Price to Book Value......Page 226
4.1 Determining Book Value......Page 228
4.2 Valuation Based on Forecasted Fundamentals......Page 233
4.3 Valuation Using Comparables......Page 234
5 Price to Sales......Page 235
5.1 Determining Sales......Page 236
5.2 Valuation Based on Forecasting Fundamentals......Page 238
5.3 Valuation Using Comparables......Page 239
6 Price to Cash Flow......Page 241
6.1 Determining Cash Flow......Page 242
6.2 Valuation Based on Forecasting Fundamentals......Page 247
7 Enterprise Value to EDITDA......Page 248
7.1 Determining EBITDA......Page 249
8 Dividend Yield......Page 252
8.1 Calculation of Dividend Yield......Page 254
8.3 Valuation Using Comparables......Page 255
9 International Valuation Considerations......Page 256
10 Momentum Valuation Indicators......Page 257
11 Valuation Indicators and Investment Management......Page 260
12 Summary......Page 262
Problems......Page 266
Solutions......Page 273
Learning Outcomes......Page 280
2 Residual Income......Page 281
2.1 Commercial Implementations......Page 284
3 The Residual Income Valuation Model......Page 285
3.1 The General Residual Income Model......Page 290
3.2 Fundamental Determinants of Residual Income......Page 294
3.3 Residual Income Valuation in Relation to Other Approaches......Page 295
4 Accounting and International Considerations......Page 296
4.1 Violations of the Clean Surplus Relationship......Page 297
4.3 Intangible Assets......Page 299
4.5 Other Aggressive Accounting Practices......Page 302
4.6 International Considerations......Page 303
5 Single-Stage Residual Income Valuation......Page 304
6 Multistage Residual Income Valuation......Page 305
7 Summary......Page 310
Problems......Page 313
Solutions......Page 317
References......Page 324
Glossary......Page 328
Index......Page 334