Topic 9. Equity Valuation Models.pptx

Topic 9. Equity Valuation Models.pptx - BX2031 Equity...

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Equity Valuation Models 1 BX2031  Personal portfolio Management
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Overview of Sessions Video 1 – Equity valuation models: 1 Introduction 2 Review of present value concepts 3 Present value and ordinary equity 4 Dividend discount model 5 Earnings capitalisation model 6 Forecasting Required reading: Chapter 11 Brailsford et al. (2015) 5 th ed.
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understand the basic principles of equity valuation understand the key assumptions underpinning the dividend discount model & earnings capitalisation model apply the dividend discount model & earnings capitalisation model explain the different types of forecasts of economic and company specific financial variables and the advantages and disadvantages of the different forecasting procedures. 3 Learning outcomes: Equity valuation models
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Purpose of investment analysis is to select stocks with maximum return and minimum risk. Valuation is the determination of the ‘fair’ value of a security’s ‘worth’. Why is valuation required? investment portfolios trading strategies mergers and acquisitions value private companies stale market prices determine ‘fair’ value for buying or selling: Principles: if fair value > price ----buy at discount if fair value < price ---- sell at discount. 4 Introduction
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PV model (DCF - discounted cash flow analysis): If an annuity (i.e. C is constant cash flow) apply PVAIF present value annuity interest factor NPV: (Net present value analysis) 5 Review of present value concepts
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PV and ordinary equity evaluation: where PV and equity evaluation assuming a time horizon to infinity (e.g. preference share) If cash flow stream (i.e. dividend) is considered an infinite time series 6 Present value and ordinary equity
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The holder of a share receives two types of cash flows: periodic dividends and capital return on the sale (or liquidation) of the share Example: You expect National Foods Ltd. to pay a dividend of $0.30 next year. The ordinary shares will be sold after the dividend for $5.20. Assume required rate of return (i.e. cost of equity, ke) = 15% per annum. The PV of one share is calculated to be approximately: 7 Present value and ordinary equity
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Proposes that equity can be evaluated by discounting the future expected dividends at the cost of equity capital where Intuitively, the price at time n represents the present value of the future flow of dividend payments 8 Dividend Discount Model
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You expect National Foods Ltd. to pay a dividend of $0.30 next year (year one), $0.40 in year two, and $0.50 in year three. After year three, the ordinary share is expected be sold for $4.40.
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