Equity

EV/EBITDA pros

EV/EBITDA is usually more appropriate than P/E alone for comparing companies with different financial leverage (debt), EV=control perspective Good for valuing capital intensive businesses with high Dep & Amort Usually positive

Three Limitations to Cross Sectional Analysis(where they give you a regression formula and you plug it in)

The predictive power of the regression for a different stock and different time period is not known. The regression coefficients and explanatory power of the regressions tend to change substantially over a number of years. Problem of multicollinearity (correlation within 2 or more independent variables in a multiple correlation),

three types of tax rates

The statutory tax rate, which is the tax rate applying to what is considered to be a company's domestic tax base. The effective tax rate, which is calculated as the reported tax amount on the income statement divided by the pre-tax income. (income tax expense as % of pretax income) The cash tax rate, which is the tax actually paid (cash tax) divided by pre-tax income.

bottom-up approaches to modeling revenue

Time series: forecasts based on historical growth rates or time-series analysis. Return on capital: forecasts based on balance sheet accounts, for example interest revenue for a bank may be calculated as loans multiplied by the average interest rate. Capacity-based measure: forecasts (for example, in retailing) based on same-store sales growth and sales related to new stores.

Pros and Cons of RI

(+) TV does not dominate the IV estimate (+) Accounting data are easy to find (+) Applicable for non-dividend paying firms and non-positive FCF (+) Applicable even if CFs are volatile (+) Focus on economic rather than just on accounting profitability (-) Accounting data can be manipulated (-) Adjustments due to accounting data (-) Clean surplus relation does not always hold

Gordon Growth ERP

(1-year forecasted dividend yield on market index, [D1/P]) + (consensus long-term earnings growth rate) - (long-term government bond yield) E(next yr div yield) +LTEGR - LTGBY

Defensive interval ratio

(Cash + Short-term marketable investments + Receivables) ÷ Daily cash expenditures

r (required rate of return) derived from the GGM

(D1/P0) + g

Fraction of the company's value that comes from its growth opportunities

(PVGO/V0)

Return on Capital Employed (ROCE) what is it better in identifying

(ROCE), which is essentially ROIC before tax. This measure is defined as operating profit divided by capital employed (debt and equity capital). As a pretax measure, ROCE can be useful in several contexts, such as peer comparisons of companies in countries with different tax structures because comparison of underlying profitability would not be biased in favor of companies benefiting from low tax rate regimes, i.e. in other countries.

Forecast COGs

(historical COGs/revenue) * future revenue or (1-gross margin) * estimate of future revenue

Supply Side/Macroeconomic Models AKA Ibbotson-Chen Model

**Use LT expected Inflation **RFR= LT gov bond yields

Harmonic Mean

-Applied to group of price multiples/ index - used to reduce the impact of large outliers

disadvantages of using P/S ratios include

-High growth in sales does not necessarily indicate high operating profits -do not capture differences in cost structures -Sales is a prefinancing income measure -revenue recognition practices can still distort sales forecasts. For example, analysts should look for company practices that speed up revenue recognition.

Reg and Justified Dividend Yield formula and characteristics

-Trailing div yield = 4 times the most recent quarterly per share div/pps High div yield = value strategy - Positively related to required rate of return - negatively related to the expected rate of growth in dividends and positively related to the stock's required rate of return. - Dividends are a less risky component of total return than capital appreciation

Total Discount

1 - [(1 - DLOC)(1 - DLOM)]

What happens if costs increase (2 choices)

1) Company can increase price FIRST but will have lower sales 2) Company can increase price LATER but will have lower gross margins in the meantime Increase price means passing it to consumers

Top Down: "Market growth and market share."

1. Estimate of industry sales (market growth), 2. Then company revenue is estimated as a percentage of industry sales (market share). Market share times estimated industry sales provides the estimate of company revenues.

The most commonly used patterns for Dividends (4)

1. Gordon growth 2. Two stage 3. H Model 4. 3 stage

Two types of equity risk premium

1. Historical: Weakness is that mean and variance of returns aren't constant over time. Premium is counter-cyclical - high during bad times. Also survivorship bias. Mean can be geometric or arithmetic, with geometric always being lower 2. Forward/Ex-ante: Gordon growth, supply side models, and estimates

What are the 3 phases of company growth relative to GDP

1. mature phase =If company is growing at same rate as nominal GDP 2. transition phase= is characterized by earnings growth rates above the average nominal growth for the economy but with the growth rate declining. 3. supernormal growth phase= has growth higher than the economy's nominal growth rate.

Sustainable growth rate formula and what does it assume about growth

= (rr * ROE) rr= 1-DPR *DPR = div/NI ROE = NI/Common shareholder equity Assumes that the growth will be financed with the issuance of debt and only internally generated equity will be used to maintain a target capital structure. No additional common equity will be issued. The ROE is assumed to be a constant during this period.

FCF

= Net income + Depreciation and amortization - Cash dividends − Capital expenditures. = Cash flow from operations - Capital expenditures

Momentum Indicators: Earnings surprise

= Reported EPS- expected EPS. Positive surprises may be associated with persistent positive abnormal returns, or alpha.

method of comparables and potential drawback

=values a stock based on the average price multiple of the stock of similar companies. The economic rationale for the method of comparables is the Law of One Price, which asserts that two similar assets should sell at comparable price multiples (e.g., price-to-earnings). This is a relative valuation method, so we can only assert that a stock is over- or undervalued relative to benchmark value. • Potential drawbacks that may cause errors of the method of comparables is if the industry as a whole is over/undervalued or --> if the company you are valuing's fundamentals is different from the industry or if the mean P/E is influenced by outliers • In principle, If the stock market is overvalued, an asset that appears to be fairly or even undervalued in relation to an equity index may also be overvalued.

Justified P/CF formula and adv

ADVANTAGES of using the price-to-cash flow (P/CF) ratio include -• Cash flow is harder for managers to manipulate than earnings • Price to cash flow is more stable than price to earnings - handles the problem of differences in the quality of reported earnings -are significantly related to differences in long-run average stock returns.

Justified P/B formula, adv & disadv

Advantages in P/B • Book value is a cumulative amount that is usually positive • Book value is more stable than EPS • Book value is an appropriate measure of comp with large liquid assets such as finance • useful in valuing companies that are expected to go out of business • P/Bs help explain differences in long-run average stock returns

Single-Stage Residual Income Valuation

B0= Common shareholder equity/Shares out G= LT div growth rate or LT g of RI If ROE=r, market value should equal book value If ROE <r = Negative residual income and be valued at less than book value. Residual income is likely to approach zero over time, however, as competitive forces drive industry profit margins to normal levels. Terminal value is not a large component of total value in residual income, but BV is

Beta for Private Companies

Beta for Private Company -Identify similar company as a benchmark -Estimate Beta for that company -Unlever Beta= Be * 1/(1+D/E) -Beta for original company = [Unlever Beta * 1+(D/E) of original company] Be= regression Beta, Funded by 60% debt, means D/E= (.6/.4)

When does the Fed Model consider the stock market to be overvalued

Considers the overall market to be overvalued if earnings yield on the S&P is lower than yield on 10 year US treasuries

CAPM

CAPM (r)= rfr + Beta * (ERP) = rfr + Beta * (Return on market index- rfr) Beta = measure of systematic/market risk, sensitivity of returns

What type of expenses are COGS and SG&A?

COGS (variable expenses) & SG&A (fixed expenses)

Momentum Indicators

Compare a stock's price or company's earnings to their values on earlier periods 1. Earnings surprise 2. Standardized unexpected earnings (SUE) 3. Relative-strength indicators

Price multiples

Comparing stocks' price multiples can help an investor judge whether a particular stock is overvalued, undervalued, or properly valued in terms of measures such as earnings, sales, cash flow, or book value per share. All else being equal, companies operating in a country with higher inflation will have a lower justified P/E than those operating in a country with lower inflation, because of the higher required rate of return.

Conglomerate discount and 3 explanations for it

Conglomerate is marked down in the market compared to a company with a single industry focus. Reasons for it include... 1. Internal capital inefficiency: The company's allocation of capital to different divisions may not have been smart 2. (internal) factors: For example, the company may have pursued unrelated business acquisitions to hide poor operating performance. 3. research measurement errors: hypothesize that conglomerate discounts do not exist, but rather are a result of incorrect measurement.

EV/EBITD cons

Cons of EBITDA EBITDA will overestimate cash flow from operations if working capital is growing Doesn't capture capex (if capex eventually = dep then we can expect EBITDA to be accruate) Ignores revenue recognition policies

Valuing from a controlling interest to a non controlling and vice versa

Control interest to noncontrolling interest = (-)DLOC to comparable data because you don;t control that shit Non Control interest to control interest - (+) Control Prem is added to comp data

Porters 3 strategies for achieving above average performance

Cost leadership: being the lowest cost producer Differentiation: offering unique products or services Focus: seeking a competitive advantage within a target segment

preferred stock value

D/r

DLOM variances

Decrease if: 1. Impending IPO 2. Payment of dividends 3. Earlier higher payments 4. Contractual restrictions Increase if: 1. Contractual restrictions on selling stock 2. Greater risk and value uncertainity

Justified P/B disadv

Disadvantages in P/B • P/Bs do not reflect the value of intangible economic assets, such as human capital. • May mislead a firm that outsources its production will have fewer assets, lower book value, and a higher P/B ratio than an otherwise similar firm • accounting conventions can obscure the true investment in the firm • Age in assets can also make comparability difficult between companies p/b

Disadvantages of P/CF

Disadvantages of P/CF include - items affecting actual cash flow from operations, such as noncash revenue and net changes in working capital, are ignored. -FCFE does have the possible drawback of being more volatile than cash flow for many businesses. FCFE is also more frequently negative than cash flow.

In a In the Gordon growth model what two components make up Total return? And what happens when the required rate of return equals the expected total return?

Dividend yield + Capital gains yield When a stock is fairly valued, the expected total return will equal the required return or discount rate

Build up Method

Don't use Betas on this one just the adjustments given It is usually applied to closely held companies where betas are not readily obtainable ± Country return ± Industry adjustment ± Size adjustment ± Leverage adjustment = Real required rate of return

Country Spread Model: ERP Estimate

ERP = ERP for a developed market + Country Premium Country Premium= the yield on bonds in the emerging market (-) the yield on corresponding bonds in the developed market

Momentum Indicators: Standardized unexpected earnings (SUE

Earnings surprise/stdv(Earnings Surprise)

Total invested Capital

Enterprise value + cash and short term investments

Enterprise Value formula

Enterprise value =total company value = [MVD + MVE + + Non-control Int + MV Preferred Stock - Cash & ST investments]

Expected Alpha & Realized Alpha

Expected alpha = Expected return - Required return Realized alpha = Actual holding period return − current required return

What happens when a company earns higher/lower revenue than LT-historical average. Also what happens in a merger/acquisition

Expected to earn more revenue = the company's shares are likely to trade at a premium to their historical average If competition in the industry is expected to intensify in the future = then the company's shares are likely to trade at a discount If M or A = the historical valuation multiple of the company should no longer be relied on as either a reference point or as justification of a target multiple

Extended CAPM

Extended CAPM= rfr + ERP + small stock prem + company specific prem

FCFE formula from NI, CFO and FCFF

FCFE = NI + NCC − FCInv − WCInv + Net borrowing FCFE = CFO - FCInv + Net borrowing FCFE = FCFF - Int(1 - Tax rate) + Net borrowing

FCFF using NI and CFO

FCFF = NI + NCC + Int(1 - Tax rate) - FCInv - WCInv FCFF = CFO + Int(1 - Tax rate) - FCInv • The most common noncash charge is depreciation expense. • WCInv= Change in CURRENT ASSETS (ie AR, Marketable sec, inventories) minus CURRENT LIABILITIES (such as accounts payable, Accrued taxes and expenses). -->WCInv excludes cash and cash equivalents as well as notes payable and the current portion of long-term debt.

FCFF definition and when to use it

FCFF= the CF available to the company's suppliers of capital (suppliers of capital include common stockholders, bondholders, and sometimes, preferred stockholders) after all operating expenses (including taxes) have been paid and necessary investments in working capital (e.g., inventory) and fixed capital (e.g., equipment) have been made. • Use when capital structure fluctuates (when Net Borrowing goes up and down) • A levered company with negative FCFE. • Working with FCFF is likely to be easiest when a company is levered and has negative FCFE.

FCFE equity value

Firm Value-MV Debt = Equity value Divide this by the Shares out to get value per share

Multifactor models

Greater explanatory power than CAPM required return = RF+risk prem1+risk prem2 . . . risk premium= factor sensitivity(beta)*factor risk premium

Top Down: "Growth Relative To Gdp Growth"

Growth Relative To Gdp Growth= if GDP is forecast to grow at 4% Nominal and the company's revenue is forecast to grow at a 15% faster rate, the forecast percent change in revenue would be 4% × (1 + 0.15) = 4.6%, or 60 bps higher in absolute terms. Nominal GDP = Real GDP + Inflation

Appropriate forecast horizon

Holding period for stock (if they have 25% annual turnover, than four years) should be long enough to include middle of business cycle = normalized earnings If companies earnings growth

L[E1]ading/Forward P/E, and justified

If justified is larger than forward = company is undervalued

Current/Trailing P/E, and justified

If justified is larger than trailing = company is undervalued

Strategic vs Financial transaction

In a strategic transaction, valuation of the firm is based in part on the perceived synergies with the acquirer's other assets. A financial transaction assumes no synergies, as when one firm buys another in a dissimilar industry.

Three major approaches to valuing private companies

Income, Market, Asset

Inflection Points

Instances where future won't be like past. Examples include changes in: 1. Economic environment 2. Business cycle stage 3. government regulations 4. Technology

Porters 5 forces and how each force POSITIVELY affects profitability

Intra-industry rivalry. =Lower rivalry among industry participants New entrants. =Relatively high costs to enter Substitutes. =When few potential substitutes/high customer switching costs Supplier power. =More Suppliers Buyer power. =More customer/specialized product

Characteristics of Lower and Higher Residual Income Persistence

Lower Residual Income Persistence -Extreme accounting rates of return (ROE that is probably unsustainable) -Extreme levels of special items (e.g., nonrecurring items) - Extreme levels of accounting accruals Higher Residual Income Persistence -Low dividend payout -High historical persistence in the industry

Macro Multifactor Model featuring 5 risks

Macro Multifactor Model= rfr + (confidence risk*sensitivity) + (time horizon risk* sensitivity) + (inflation risk *sensitivity) + (business cycle risk*sensitivity) + (market timing risk*sensitivity) = Required rate of return

P/B Multiple using market value and BV and how to get MV and BV

Market Value of Equity ----------------------- Book value of equity BV= total A-total L - preferred stock Common adjustments are: -Tangible BV (BV of equity-intangible assets) -If there are off the BS A/L -Differences in MV and BV are large -FIFO vs LIFO

Market Value Added (MVA)

Market value of the company−Accounting book value of total capital SO*pps - (BVE+BVD) A company that generates positive economic profit should have a market value in excess of the accounting book value of its capital. Value created by Management since inception

Net Income Using EBIT and EBITDA

NET INCOME = (EBIT-INT) * (1-T) NET INCOME = (EBITDA - DEP - INT) * (1 - T)

Net Income from EBIT

NI = (EBIT- Int)*(1-t) EBIT-Int = Pretax income Always subtract the interest first then multiply by (1-t)

If which 4 multiples are lower than peers are they considered undervalued

P/E, P/B, P/S and EBITDA

PE to G ratio formula and limitations

PEG = P/E /expected earnings growth rate (in percentage terms). .Smaller PEG=more attractive ***use actual growth as denominator so 16% use /16 not .16*** Limitations include PEG assumes a linear relationship between P/E and growth. In theory, the relationship is not linear. PEG does not factor in differences in risk, an important determinant of P/E. PEG does not account for differences in the duration of growth. For example, dividing P/Es by short-term (five-year) growth forecasts may not capture differences in long-term growth prospects.

Drawbacks of dividend yield formula

Possible drawbacks of using dividend yields include Dividend yield is only one component of total return; doesn't use the cap appreciation component Investors may trade off future earnings growth to receive higher current dividends. That is, holding return on equity constant, dividends paid now displace earnings in all future periods (a concept known as the dividend displacement of earnings). Assumes market is biased in its risk assessment of components of returns (thinks capital appreciation is more risky)

Private vs Public firms

Private firm's small size may reduce growth prospects because they have reduced access to capital to fund the growth in their operations. Agency issues (more common in public companies) arise in a corporation when managers act in their own interests instead of the interests of shareholders Private companies might decide to remain privately held because higher compliance costs may outweigh any other benefits of being public

Persistence factor, and what does a higher and lower PF mean

Projected rate at which residual income is expected to fade over the life cycle of the firm A persistence factor of 0.10 indicates that residual income is forecasted to decline at an average rate of 90% per year. It is between zero and one A persistence factor of one implies that residual income will not fade at all; rather it will continue at the same level indefinitely (i.e., in perpetuity) A persistence factor of zero implies that residual income will not continue after the initial forecast horizon.

Return on Invested Capital (ROIC) definition what is NOT affected by and formula

ROIC measures the profitability of the capital invested by equity and debt holders. ROIC is a better measure of profitability than ROE because it is not affected by a company's degree of financial leverage. In general, sustainably high ROIC is a sign of a competitive advantage. To increase ROIC, a company must either increase earnings, reduce invested capital, or both. ROIC is the relevant measure of profitability because EBITDA flows to ALL PROVIDERS OF CAPITAL. high ROIC is a sign of a competitive advantage like a patent = NOPLAT/Invested Capital = (EBIT *[1-t])/ (Op A - OpL)

Net income and profit KEY

Remember EBIT=Operating profit

Margin and Turnover

Rev on the bottom of margin ratios Rev on the top of turnover ratios

Economies of Scale and factors that lead to increased EoS

Situation in which average costs per unit of a good or service produced fall as volume rises. --Factors that can lead to economies of scale include, --higher levels of production, --greater bargaining power with suppliers, --lower cost of capital, --lower per unit advertising expenses. Gross and operating margins tend to be positively correlated with sales levels in an industry that enjoys economies of scale.

Blume adjusted Beta definition and formula

Some risk prem have beta drift. Beta drift refers to the observed tendency of an estimated beta to revert to a value of 1.0 over time. To compensate, the Blume method can be used to adjust the beta estimate: (2/3 × regression beta) + .333333

Survey estimates ERP

Survey estimates of the equity risk premium involve asking a sample of people—frequently, experts—about their expectations for it, or for capital market expectations from which the premium can be inferred

What does the Yardeni Model incorporate that the Fed Model does not

The Yardeni model incorporates the consensus five-year earnings growth rate forecast for the market index, a variable missing in the Fed model.

Implied growth rate between 2005 - 2007

The growth rate from 2005 to 2007 is (2007 Div / 2005 Div)^1/2 − 1

Economic Value Added

Use beg book value of assets

Using any DCF model, all else being equal, justified P/E is ___ related to required rate of return (int rates therefore inflation) and ___ related to growth rate of FCF (ex. div growth)

Using any DCF model, all else being equal, justified P/E is: inversely related to the stock's required rate of return, inflation, and Beta and positively related to the growth rate(s) of future expected cash flows, however defined.

CCM

V = FCFE1/(r - g)

Present Value of Growth Opportunities (PVGO)

V0 = (EPS1/r) + PVGO

Using operating assets how do you calculate value of the firm and value of common stock?

Value of op assets = FCFF0(1 + g)/(WACC - g) Value of firm= Value of operating assets + Value of non-operating assets Value of company's common stock = Value of operating assets + Value of non-operating assets - Market value of debt - Preferred stock.

BYPRP cost of equity/required rate of return when is it appropriate to use. Also how the discount rate affect the value

YTM on the company's long- term debt + Risk premium Appropriate if the company has publicly traded debt and the various risk factors are taken to account in the YTM you just add a premium for the added risk for holding firms equity ***Lower discount rate = higher estimated value***

Justified P/S formula and adv

[Net profit margin x payout ratio x (1+g)]/ r-g # like trailing P/E except net profit margin is included here Advantages include - sales revenue is always positive -revenue is not as easy to manipulate or distort as EPS and book value -P/S ratios are not as volatile as P/E multiples - good for valuing stocks in mature or cyclical industries and start-up companies with no record of earnings -P/S are significantly related to differences in long-run average stock returns.

Compliance-Related Valuations

accounting or tax knowledge for legal or regulatory reasons Financial reporting/often related to goodwill impairment tests/Tax purposes

Macro Multifactor Model : Peter Stambaugh

adds a (liquidity Beta *Liquidity Prem)

Residual Income

aka economic profit net income less a charge (deduction) for common shareholders' opportunity cost in generating net income. A company can have positive net income but may still not be adding value for shareholders if it does not earn more than its cost of equity capital. Residual income models explicitly recognize the costs of all the capital used in generating income.

Momentum Indicators: Relative-strength indicators

allow comparison of a stock's performance during a period either with its own past performance (first type) or with the performance of some group of stocks (second type). The rationale for using relative strength is the thesis that patterns of persistence or reversal in returns exist. Relative strength is based strictly on price movement (a technical indicator). High relative strength would be relevant for a portfolio managed with a growth/momentum investment style.

Screening Definition

application of a set of criteria to reduce an investment universe to a smaller set of investments and is a part of many stock selection disciplines. In general, limitations of such screens include the lack of control in vendor-provided data of the calculation of important inputs and the absence of qualitative factors.

What is total return on an equity investment

capital appreciation component + dividend yield component

Litigation-Related Valuations

comfortable with a legal setting and specific jurisdictions shareholder suits, damage claims, lost profits claims, or divorce settlements

Clean Surplus Accounting and violations

condition that income (earnings) reflects all changes in the book value of equity other than ownership transactions anything that flows though to OCI instead of the NI statement violates the clean surplus relationship: unrealized g/l in AFS unrealized g/l from CF Hedge unrealized g/l from current rate method pension adjustments the book value of equity is stated accurately because it includes "accumulated other comprehensive income," but net income is not stated properly from the perspective of residual income valuation.

Projected accounts receivable

days sales outstanding * (forecasted sales/365)

FCFF Firm Value

discounted at the WACC

non-operating assets

excess cash, excess marketable securities, or land held for investment

Higher dividend yield relative to peers means the stock is _____

higher div yield = Undervalued!

interest rate on average cash position/avg gross and net debt

interest rate on average cash position = interest income divided by the average cash position Interest rate on average gross debt = interest expense divided by average gross debt: interest rate on the average net debt is = net interest expense divided by average net debt

Present value of perpetual stream of residual income

intrinsic value of a share of common stock is the sum of book value per share and the present value of expected future per-share residual income V0 = Book value per share + Present value of expected future per-share residual income. Present value of perpetual stream of residual income is calculated as: RI/r

Transaction-Related Valuations

investment bankers/Venture capital financing/ Initial public offering (IPO)/Performance-based managerial compensation

FCFE definition

is the cash flow available to the company's holders of common equity after all operating expenses, interest, and principal payments have been paid and necessary investments in working and fixed capital have been made. Use when capital structure is stable If a company's capital structure is relatively stable, using FCFE to value equity is more direct and simpler than using FCFF

Income Approach definition, Stage it's appropriate in (3 methods)

present discounted value of the income expected from it. Absolute Approach. Good for "high growth stage" -FCF method -capitalized cash flow method (*Single Stage Model in perpetuity) -excess earnings method

Market Approach definition, Stage it's appropriate in (3 methods)

pricing multiples from sales of assets viewed as similar to the subject asset. Relative approach, Good for "Mature Stage" guideline public company method (GPCM) ->value estimate based on the observed multiples from trading activity. Control Premium is added guideline transactions method (GTM)->value estimate based on pricing multiples derived from the acquisition of control of entire public or private companies that were acquired ->sales of entire companies prior transaction method (PTM) ->transaction data from stock of actual company and is best for valuing minority interest

Macro Multifactor Model : Fama French Model

required return of stock j = RF + βmkt,j × (Rmkt - RF) + βSMB,j × (Rsmall - Rbig) + βHML,j × (RHBM - RLBM) (Rmkt - RF) = MARKET PREM return on a value-weighted market index minus the risk-free rate (Rsmall - Rbig) = SIZE PREM a small-cap return premium equal to the average return on small-cap portfolios minus the average return on large-cap portfolios (RHBM - RLBM) = VALUE PREM a value return premium equal to the average return on high book-to-market portfolios minus the average return on low book-to-market portfolios

What are the 4 type of required rate of return?

the CAPM a multifactor model such as the Fama-French or related models a build-up method, such as the bond yield plus risk premium method: When companies are closely held and betas aren't available Bond yield+premium: Appropriate if company has publicly traded debt

How to calaculate growth over a ___ year period

to calculate a growth rate of 4 years take EPS in year 4/EPS year 1 and raise it to 1/4 then subtract 1

H model formula

two-stage model in which growth begins at a high rate and declines linearly throughout the supernormal growth period until it reaches a normal rate at the end. H = half-life in years of the high-growth period

Basic valuation principle

value is always estimated as the present value of the expected future cash flows discounted at the appropriate discount rate.

Market Approach definition, Stage it's appropriate in

values a private company based on the values of the underlying assets of the entity less the value of any related liabilities. be appropriate for very small businesses with limited intangible value or early stage companies with minimal profits or companies in liquidation Good for finance firms, Nat resources companies, value of a company is the sum of the value of operating assets and the value of nonoperating assets

Always use MVE (SO *PPS) when calculating the numerator

when the multiple is NOT justified

What are the Two common top-down approaches to modeling revenue are

• "Growth Relative To Gdp Growth" • "Market growth and market share."

If a security trading within a band of ±10 percent within a "fair value range."

• Calculate intrinsic value using DDM • (Intrinsic value *1.10) then (intrinsic value *.9) • See if current value is within that ±10 percent range

Gordon Growth Model

• Stable mature firms, Good for valuing indices, easy straightforward • LIMITATIONS INCLUDE, sensitive to inputs, minority position, not easy to apply to non div stocks, hard with firms with unpredictable growth patterns • Gordon growth model can accurately value companies that are repurchasing shares when the analyst can appropriately adjust the dividend growth rate for the impact of share repurchases. • Gordon growth model form of the DDM is most appropriate for companies with earnings expected to grow at a rate comparable to or lower than the economy's nominal growth rate (nom=real +inflation) ALWAYS D1