Reading 50- Equity Valuation: Concepts & Basic Tools Questions And Answers Well Defined.
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Course
PBV
Institution
PBV
the larger the % difference between market prices & estimated values, - correct answer the more likely the investor is to take a position based on estimate of intrinsic (fundamental) value
the more confident the investor is about the appropriateness of the va...
the larger the % difference between market prices & estimated values, - correct answer
the more likely the investor is to take a position based on estimate of intrinsic (fundamental) value
the more confident the investor is about the appropriateness of the valuation model, - correct answer
the more likely investor is to take an investment position in an overvalued/ undervalued stock
if analyst is more confident of his input values, - correct answer more likely to
conclude that security is overvalued
market price is more likely to be correct for a security when - correct answer many
analysts follow security
present value model (discounted cash flow model) - correct answer estimate
intrinsic value of security as present value of future benefits
-dividend discount model (DDM)
-free cash flow to equity model (FCFE)
(-) not used for companies that have only 1 year of data available
multiplier model (market multiple model) - correct answer price multiples or
enterprise value multiples
P/E, P/S, P/B, EV (-) MV debt hard to obtain
asset-based model - correct answer intrinsic value of common stock is estimated as
total value of [assets- liabilities] & preferred stock
,book value (carrying value)
dividend discount model (DDM) - correct answer intrinsic value of stock= PV of
future dividends + expected selling price in one year
V0=D1/(1+r) + P1/(1+r)
one-year holding period (DDM) - correct answer value of stock= present value of
any dividends during the year + present value of expected price of stock at end of year
multiple-year holding period DDM - correct answer sum present value of dividends
over holding period and the estimated terminal (ending) value
free cash flow to equity (FCFE)=
represents cash that could be paid out to common shareholders
a measure of dividend-paying capacity - correct answer net income + depreciation -
increase in working capital- fixed capital investment (FCInv)- debt principal repayments + new debt
issues
discount expected future FCFE by required rate of return on equity:
V0= sum FCFE/(1+r)^t
present value of a non-callable, non-convertible PERPETUAL preferred share - correct answer
V0= D0/r
present value of a non-callable, non-convertible preferred stock - correct answer
V0=∑ D/(1+r) + F/(1+r) (similar to DDM but P1 is replaced by F)
,F= preferred stock's par value
Gordon growth model (constant growth model) - correct answer annual growth
rate of dividends, g, is constant.
dividend D1= D0(1+g)
dividend D2= D0(1+g)^2
dividend D3= D0/(1+g)^3...
when should you use the Gordon growth model? (key words) - correct answer
forever
infinitely
indefinitely
just paid, recently paid, current dividend= last dividend D0
will pay, is expected to pay= D1
price multiple - correct answer ratio that compares share price with some monetary
flow or value
(-) doesn't consider the future
P/E ratio - correct answer price to earnings per share
a low P/E= buy
P/S - correct answer price to sales per share
, 1. sales revenue/ number of shares
2. divide stock price by sales per share P/S
P/B - correct answer price divided by book value of equity per share
P/CF - correct answer price divided by cash flow per share
cash flow= operating or free cash flow
justified P/E - correct answer P/E based on fundamentals
derived from Gordon growth model d/(r-g)
P0/E1=p/(r-g), where p= payout ratio
the justified P/E ratio is very sensitive to inputs (r and g)
net effect on firm value is ambiguous* (because have to take into account value of r in d/(r-g) P/E ratio is
inversely related to r & directly related to g. payout ratio p is ambiguous "dividend displacement of
earnings"
higher P/E - correct answer higher dividend payout ratio
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