View
1.494
Download
5
Tags:
Embed Size (px)
DESCRIPTION
Stock valuation ppt @ bec doms on finace
Citation preview
1
Stock Valuation
2
Stock Valuation
Learning Goals1. 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.
3
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.
4
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
5
Table 8.1 Comparative Dollar Based and Common-Size Income Statements
6
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
7
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%.
Estimated EPSnext year
$6.5 million
2 million $3.25
8
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
Estimated dividendsper share in year t
Estimated EPS
in year t
Estimatedpayout ratio
9
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%.
Estimated dividendsper share next year
$3.25 .40 $1.30
10
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
11
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
12
Step 3: Forecast Future Stock Price
Example: Assume estimated EPS are $3.25 and the estimated P/E ratio is 17.5 times.
To estimate the stock price in three years, extend the EPS figure for two more years and repeat the calculations.
Estimated share priceat end of year t
Estimated EPS
in year t
Estimated P/Eratio
Estimated share priceat the end of next year
$3.25 17.5 $56.88
13
Table 8.4 Summary Forecast Statistics, Universal Office Furnishings
14
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
15
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
16
Required Rate of Return
Required Rate of Return is the return necessary to compensate an investor for the risk involved in an investment. Used as a target return to compare forecasted
returns on potential investment candidates
Requiredrate of return
Risk-free
rate
Stock'sbeta
Marketreturn
Risk-freerate
17
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?
Required return 5.5% 1.30 15.0% 5.5% 17.85%
18
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
19
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
future dividends to be received Assumes dividends will not grow over time
Value of ashare of stock
Annual dividends
Required rate of return
20
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
of steady dividend payments
Value of ashare of stock
Next year's dividends
Required rateof return
Constant rate of
growth in dividends
21
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
Value of a shareof stock
Present value offuture dividendsduring the initial
variable-growth period
Present value of the priceof the stock at the end of
the variable-growth period
22
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
Present value ofa share of stock
Present value offuture dividends
Present value of
the price of the stockat date of sale
23
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
Stock price EPS P/E ratio
24
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
P/CF ratio Market price of common stock
Cash flow per share
25
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
P/S ratio Market price of common stock
Sales per share
26
Price-to-Book-Value (P/BV) Approach
Similar to P/E approach, but substitutes book value for earnings
P/BV Market price of common stock
Book value per share
27
Table 8.2 Average Market P/E Multiples 1977–2006
28
Table 8.5 Using the Variable-Growth DVM to Value Sweatmore Stock