# Stock Valuation PPT _ BEC DOMS ON FINACE

Document Sample

```					Stock Valuation

1
Stock Valuation
 Learning Goals
1. Explain the role that a company’s future plays in
stock valuation.
2. Develop a forecast of a stock’s cash flow, expected
dividends and share price.
3. Discuss the concepts of intrinsic value and required rates
of return, and note how they are used.
4. Determine the underlying value of a stock using various
dividend valuation models.

2
Stock Valuation
 Learning Goals (cont’d)
5. Use other types of present-value-based models to derive
the value of a stock as well as alternative price-relative
procedures.
6. Gain a basic appreciation of the procedures used to value
different types of stocks, from traditional dividend-paying
shares to more growth-oriented stocks.

3
Valuing a Company and Its Future

 The single most important issue in the stock
valuation process is what a stock will do in
the future
 Value of a stock depends upon its future returns
from dividends and capital gains/losses
 We use historical data to gain insight into the future
direction of a company and its profitability
 Past results are not a guarantee of future results

4
Table 8.1 Comparative Dollar Based and
Common-Size Income Statements

5
Steps in Valuing a Company
 Three steps are necessary to project key
financial variables into the future:
 Step 1: Forecast future sales & profits
 Step 2: Forecast future EPS and dividends
 Step 3: Forecast future stock price

6
Step 2: Forecast Future EPS (cont’d)

 Example: Assume estimated profits are \$6.5
million, 2 million shares of common stock are
outstanding, and the dividend payout ratio is
estimated at 40%.

t e S \$m
i d
s t P
Ea E
m      . ln
6 io
5l i
      .5
3
\$2
ee
nyt r
xa    2l n
mio
l
i

7
Step 2: Forecast Future Dividends

 Forecasted Dividend Payout ratio
based upon:
 “Naïve” approach based upon continued historical
trends, or
 Historical trends adjusted for anticipated changes
in operations or environment

s t dn
ta i e
i d
md
Ee i d Ee S Ee
v s s tE
ta P
i d
m     ta
i d
m
st
     
er e
r ea
si r
h
pa ynt   ie
nt
y
ar  ar
y i
oo
ua
ptt

8
Step 2: Forecast Future
Dividends (cont’d)
 Example: Assume estimated profits are \$6.5
million, 2 million shares of common stock are
outstanding, and the dividend payout ratio is
estimated at 40%.

s a ids
t evd
i di n
m
E t de
 .  3
3 4 \$
2 0 1
5
\$ .   .0
ea e e
r r xa
se t r
phny

9
Step 3: Forecast P/E Ratio
 Estimated P/E ratio based upon:
 “Average market multiple” of all stocks in the
marketplace, or
 “Relative P/E multiple” of individual stocks
 Adjust up or down based upon expectations of
economic conditions, general stock market
outlook in near term, or anticipated changes in
company’s operating results

10
Step 3: Forecast P/E Ratio
 Estimated P/E ratio is function of several variables,
including:
 Growth rate in earnings
 General state of the market
 Amount of debt in a company’s capital structure
 Current and projected rate of inflation
 Level of dividends

11
Step 3: Forecast Future Stock Price
Ed p
s ts r
tah c E d \$3.25 itP
i Assume estimated EPS are
m ee s eS s e
a
 Example:e ri itE E d ta P
m

m
ta /
and theE
tdratio
ef r
n a
aP/E e is 17.5 times.t
estimated ot
y           n
ieyar        r
ai
to

sa h r
t ea i
i dr c
m
Et se e      p
estimatedstocke in \$   the
 To a e fx r . years, extend .
h
t n e the n price three 1 \$8
te o t a    y
2 .
3 7 5
5 5 68
EPS figure for two more years and repeat the
calculations.

12
Table 8.4 Summary Forecast Statistics,
Universal Office Furnishings

13
Using Stock Valuation
 Once we have an estimated future stock price, we
can compare it to the current market price to see if it
may be a good investment candidate:
current price   < estimated price   undervalued
current price   = estimated price   fairly valued
current price   > estimated price   overvalued

14
The Valuation Process
   Valuation is a process by which an investor uses risk and
return concepts to determine the worth of a security.
   Valuation models help determine what a stock ought to be worth
   If expected rate of return equals or exceeds our target yield, the stock
could be a worthwhile investment candidate
   If the intrinsic worth equals or exceeds the current market value, the
stock could be a worthwhile investment candidate
   There is no assurance that actual outcome will match
expected outcome

15
Required Rate of Return
 Required Rate of Return is the return
necessary to compensate an investor for the
risk involved in an investment.
returns on potential investment candidates

Red R
qu
i
re   r
if
-
k e So
t'
cs M if 
a
r
se k k R
e se
t -
ke
r
         
r fr
et
t e
arn r
o u   e a  r
t
a  b
e
t   n r 
re
t
u  a
t
e

16
Required Rate of Return (cont’d)
 Example: Assume a company has a beta of
1.30, the risk-free rate is 5.5% and the
expected market return is 15%. What is the
required rate of return for this investment?

qr.  55 .
Rn 1 .%
e %0 8
e t 5.  1
u 1 . 5 7
r
d 50
i u
re    
3% 5
%

17
Other Stock Valuation Methods
   Dividend Valuation Model
   Zero growth
   Constant growth
   Variable growth
   Dividend and Earnings Approach
   Price/Earnings Approach
   Other Price-Relative Approaches
   Price-to-cash-flow ratio
   Price-to-sales ratio
   Price-to-book-value ratio

18
Dividend Valuation Model:
Zero Growth
 Uses present value to value stock
 Assumes stock value is capitalized value of its
annual dividends
 Potential capital gains are really based upon
 Assumes dividends will not grow over time
a f
Vo
le a
u        u
n dd
na vn d
A l iies

h ftc
a s k Ri dto tr
e
sroo     qea f n
u     e
e r re ru

19
Dividend Valuation Model:
Constant Growth
 Uses present value to value stock
 Assumes stock value is capitalized value of its
annual dividends
 Assumes dividends will grow at a constant rate over
time
 Works best with established companies with history
u a
l
Vo
a f
e         t r i d
x a vn
ey' id
Ne d es
s

ho c
a s k Rr re
e t
sr fo   eid
q a
u t
e      o nto
n ta f
st
Care

fu
rr
e
ot n    r h id
o nin
w vd
g tid es

20
Dividend Valuation Model:
Variable Growth
 Uses present value to value stock
 Assume stock value is capitalized value of its annual
dividends
 Allows for variable growth in dividend
growth rate
 Most difficult aspect is specifying the appropriate
growth rate over an extended period of time
reve
et l f
s
P na ou
reve t pe
et l f r
s   u h c
P na o ei
a f h
le a a
u
V o sre   uevn
tr iie
fudd s d
           o eoa e d
t t kt e o
h
f sc thn f
ftc
sk
oo        uge t l
r t ii
i
dnh ian
ha l r hrd
va -o e
i e w i
te rbg t po
abg t ed
r l r hr
i e w i
va -o po

21
Dividends-and-Earnings Approach

 Very similar to variable-growth DVM
 Uses present value to value stock
 Assumes stock value is capitalized value of its
annual dividends and future sale price
 Works well with companies who pay little or
no dividends
re a f
et u
s ve
Pn l o
re a f
et u
s ve   re a f
et u
s ve
Pn l o Pn l o
         ei oe c
hc t t
r e ho
t p f sk
sr s k fu id s
ho c
e t
aa fo    te i n
r vd
u de
ta f e
d s
e a
a tol

22
Price/Earnings (P/E) Approach
 Future price is based upon the appropriate P/E
ratio and forecasted EPS
 Simple to use and easy to understand
 Widely used in stock valuation

S r  a
oi
cc P E
k e S r
Po
t p E/ ti

23
Price-to-Cash-Flow (P/CF) Approach

 Similar to P/E approach, but substitutes
projected cash flow for earnings
 Widely used by investors
 Many consider cash flow to be more accurate
than profits to evaluate a stock
a tre c mo
r i f
k c o ot
e
Mp o ms knc
P ri 
C at
/F o
afwsr
s oe a
h   r e
C l ph

24
Price-to-Sales (P/S) Approach
 Similar to P/E approach, but substitutes
projected sales for earnings
 Useful for companies with no earnings or
erratic earnings

a t re c mo
r i fo ot
k c
e
Mp o m s knc
Pa 
So t
/ ri
a ea
l r r
e se
s
S ph

25
Price-to-Book-Value
(P/BV) Approach
 Similar to P/E approach, but substitutes book
value for earnings

a t r oo o o
r i f msk
k c
e
M pe c mtcn
P 
B
/V
o a ps r
o l e a
ku
B v e rh e

26
Table 8.2 Average Market P/E Multiples
1977–2006

27
Table 8.5 Using the Variable-Growth DVM to
Value Sweatmore Stock

28

```
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
 views: 12 posted: 2/14/2012 language: pages: 28