- Liquidation value
what the assets would bring if sold separately, net of the company’s liabilities.to be used if the company’s business model is NOT SUSTAINABLE
DDM valuation theory
for mature and profitable firms, not in a fast-growing economy, for large, diversified portfolios like the S&P 500.
* To be used if:
o The firm has a dividend history.
o The dividend policy is consistent and related to earnings. Stesso payout ratio negli anni
o The perspective is that of a minority shareholder. se mi divide divento minority
Dividend si ottiene anche come = par value * dividend rate
- 4 versions of the multiperiod DDM:
- the Gordon growth model,
- 2-stage growth model,
- H-model, and
- 3-stage growth model–> usual for tech companies (forte crescita, crescita media e poi stabile
FCF valuation theory
- FCF valuation is appropriate when the following characteristics exist:
o NO stable dividend policy.
o Dividend NOT related to earnings.
o The firm’s FCF is related to profitability.
o The perspective is that of a controlling shareholder.
RI valuation theory
amount of earnings >investor’s required earnings.
RI=economic profit.
* difficult to apply –>requires an in-depth analysis of accruals.
* The RI method is most appropriate under the following conditions:
o NO dividend history.
o The firm’s FCF is negative.
o It is a firm with transparent and high-quality accounting
build up method
add a risk premium to the firm’s bond yield.–> better for private firms
V with DDM (gordon g)
((D0*(1+g)))/((r-g))
PV growth opportunities
E1/r+PVGO
- appropriate for mature, stable firms.
- The limitations:
o Valuations are very sensitive to estimates of r and g.
o The model assumes that the firm is paying dividends now
o Unpredictable growth patterns from some firms make using the model difficult.
H-model
((D0(1+gl))/(r-gl))+((D0H*(gs-gl))/(r-gl))
linear decrease
Sustainable growth rate=g
bROE
b = retention rate
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛∗𝑟𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒∗(𝑠𝑎𝑙𝑒𝑠𝐵𝑉𝑒𝑞𝑢𝑖𝑡𝑦)
(NI/sales)((1- payout ratio))*(sales/BVequity)
FCFF
NI + Dep + (int* (1-tax rate)) – Fcinv – delta WC inv
CFO + (int * (1-tax rate)) - FCinv
dove CFO = NI +dep - delta wcinv
o FCFF better than FCFE for business cyclical company and for company with a changing capital structure
FCFE
FCFF – (int * (1-t)) + net borrowing
Dove: net borrowing = debt issues – debt repayment = liabilities t0 – liabilities (t-1)
NI – (1 – DR) * (FCInv – Dep) – (1 – DR) * delta WCinv
Dove
DR = target debt-to-asset ratio
FCINV =CAPEX = end fixed assets – beginning fixed assets + depreciation
Better with stable capital structure
Equity risk premium—> Grinold
[DY + ΔP/E + i + G + ΔS] – rf
dy= dividend yield
I = inflation forecast
g = real gdp growth rate
delta s = expected change in shares outstanding
V0 with FCFF
FCFF1 / (WACC – g)
V0 with FCFE
FCFE1 / (r-g)
Justified leading P/E
P0/E1=((1-b)/(r-g))
Earnings affected by different acocunting standards - not good to value companies internationally
Justified trailing P/E
P0/E0=(((1-b)(1+g))/(r-g))
Justified Dividend Yield
D0/P0=((r-g))/(1+g)
PEG ratio
(P/E)/g
Justified P/B
((ROE-g))/((r-g))
o Book value is usually positive, even when earnings are negative.
o Book value is more stable than EPS.
o Book value is an appropriate measure of net asset value (especially for firms such as financial institutions that hold liquid assets).
* The disadvantages of the P/B ratio include the following:
* P/Bs misleading if significant size differences between firms.
* BV is influenced by accounting choices/conventions.
Justified P/S
(((E0/S0)(1-b)(1+g))/(r-g))-→E0/S0*P0/E0
o The ratio is meaningful even for distressed firms.
o Sales revenue is not easily manipulated.
o P/S ratios are not as volatile as P/E ratios.
o P/S ratios are particularly useful in valuing mature, cyclical, and zero-income (start-up) firms.
* The disadvantages of using the P/S ratio include the following:
o High sales do not necessarily mean high profits or cash flows.
o The P/S ratio does not capture differences in the cost structure between firms.
o Revenue recognition practices still distort sales.
V0 with RI
Bo+((RI1/(1+r)+RI2/(1+r)^2 +⋯))
B0+((ROE-r)B0)/(r-g)
B0+((ROE-r)B0)/(1+r-w)
dove w persistence factor between 0 e 1
o the more sustainable the competitive advantage and the better the industry prospects, the higher the persistence factor.
RIt
Net income – Equity charge
Dove Equity charge = equity capital * cost of equity
NI - (r(BVt-1)
(ROE-r)(BVt-1)
BV = Book value of equity
- Residual income is expected to drop immediately to zero.
- Residual income is expected to decline to a long-run average level consistent with a mature industry.
- Residual income is expected to decline over time as ROE falls to the cost of equity (in which case residual income is eventually zero)
Clean surplus relationship
BV(t0)= (BV(t-1)) + EPS - div
The clean surplus relationship is violated if gains or losses, like
- unrealized changes in the fair value of some financial instruments(FVOCI),
- foreign currency translation adjustments,
- certain pension adjustments,
bypass the income statement and are charged directly to equity.
EVA
NOPAT − $WACC
