428_lecture14_growth_profitability_S09

428_lecture14_growth - Valuation Class 14 Growth and Profitability Portions of the notes are based on Easton Sommers Penman Palencia(2001 Midterm

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Valuation Class 14 Growth and Profitability Portions of the notes are based on Easton, Sommers, Penman & Palencia (2001)

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Midterm Exam Lecture materials will be the main sources of materials for the exam. 1. Market Efficiency 2. Valuation Model: DDM, FCF, RIM 3. Dividend, FCF, Earnings vs FCF 4. Book, Earning and Residual Income 5. Pricing Multiples 6. Profitability
Midterm Exam Bring a calculator (not a laptop) You can bring one 8’ x 11’ cheat sheet. Write only one side.

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Quiz (1) What is the underlying economic rationale in using pricing multiples in valuation?
Quiz (2) You have valued Earthlink Networks, an internet service provider,  relative to other internet companies using Price/Sales ratios and  find it to be under valued almost 25% . When you value it relative to  the market, you find it to be overvalued by almost 25%. How would  you reconcile the two findings? One of the two valuations must be wrong.  A stock cannot be  under and over valued at the same time. It is possible that both valuations are right. What has to be true about valuations in the industry for the second  statement to be true?

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Forward P/E Ratios and Subsequent Earnings Growth Rates: S&P 500 Firms 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0 4 8 12 16 20 24 28 32 36 40 Earnings Growth Rate (202) Forward P/E Ratio (2000) Earnings Growth Rate on Forward P/E Ratio Quiz (3): What dose this graph tell  us?
Quiz (4) Which Multiple to Use? Industry Multiple used Rational Manufacturing ? High tech, High growth ? High growth/No Earnings ? Financial services Retailing REIT (Real Estate Invest- ment Trust) ? ? ? ? If leverage is similar across firms If leverage is different

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Quiz (4) Which Multiple to Use? Sector Multiple used Rational Manufacturing P/E, P/S Use earnings If it is available and representative. Otherwise use sale. High Tech, High growth High Growth PEG Big differences in growth across firms High Growth/No Earnings P/S, V/S Assume future margins will be good Financial Services P/B Book value often marked to market Retailing P/S, P/E V/S If leverage is similar across firms If leverage is different REIT P/CF Generally no Cap Ex investment from equity earnings
Outline 1) 1. Growth, profitability and payout 1) 2. Are growth value enhancing? 1) 3. Breakdown of Profitability 1) 4. Asset Turnover and Profit Margin: A Tradeoff

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Why measure profitability? Performance evaluation Whether the firm is performing as per expectations Whether the managers are doing a good job Forecasting and valuation What does current performance tell us about the future If current performance is above expectations, will this persist in future? If current performance is below expectations,
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This note was uploaded on 09/23/2009 for the course AEM 4280 taught by Professor Ng,d. during the Spring '08 term at Cornell University (Engineering School).

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428_lecture14_growth - Valuation Class 14 Growth and Profitability Portions of the notes are based on Easton Sommers Penman Palencia(2001 Midterm

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