DDM

Question 1

FCF instead of DDM when

Answer 1

company is not dividend-paying or dividend-paying but dividends significantly exceed or fall short of free cash flow to equity or company’s free cash flows align with the company’s profitability within a forecast horizon with which the analyst is comfortable or investor takes a control perspective.

Question 2

Residual income

Answer 2

Stock’s value is book value per share plus the present value of expected future residual earnings. Can apply for both dividend paying and not paying entity. Used for companies with negative expected free cash flows within their comfortable forecast horizon.

Question 3

DDM - Stock holding for limiting time vs Infinity

Answer 3

Denominator is (1+r)^1 to n separately and terminal value is used vs usual GG model

Question 4

Adjusted Beta

Answer 4

2/3 * Raw Beta + 1/3 * 1.0. It assumes that beta reverts to the mean

Question 5

Present Value of Growth Opportunities

Answer 5

Known as the value of growth, sums the expected value today of opportunities to profitably reinvest future earnings. Refer page 72.

Question 6

V0 = E1/r + PVGO

Answer 6

1st part represent that entire Earning is paid back so no growth rate. 2nd part is usually calculated as bal fig

Question 7

Determinants of PVGO

Answer 7

Opportunity (value of company’s option to invest) & real option (value of company’s option to time the start)

Question 8

P/E of no growth company

Answer 8

P0 = E/r, P/E = 1/r

Question 9

P/E using trailing EPS

Answer 9

Usually P0 = (D0*1+g)/r-g. So add E in denominator on both sides. D0 is nothing but E0(1-b). So after deletion it is (1-b) (1+g) / (r-g)

Question 10

P/E using forward EPS

Answer 10

Now E1 is E0(1-b). So simplified version is (1-b) / (r-g)

Question 11

H-Model

Answer 11

Use it when dividend growth declines linearly over a certain period. V0 = {D0*(1+gl) + D0H(gs-gl)} / r-gl, where gl is the perpetuity growth rate, Half of year like if growth rate declines linearly over 10 yrs, H = 5.

Question 12

H-Model vs 3 stage model

Answer 12

H-model is used when growth rate declines from next yr onwards. 3 stage is usually high growth for first n yrs, then transition over some yrs, then finally constant growth rate. So we can use H-model in 3-stage. 1st calculate pv of dividend using high growth rate. Then at the end of the high growth rate yr use H-model to find its price. refer ex 18

Question 13

Formula

Answer 13

ROIC = NOPAT / Invested Capital
ROE = NI / Equity = NI / TA * TA / Equity = NI / Sales * Sales / TA * TA / Equity. Equity multiplier = TA / Equity