L4_Introduction_to_Valuation___DDM

L4_Introduction_to_Valuation___DDM - Equity Valuation...

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Unformatted text preview: Equity Valuation Methods and the DDM B, K & M, Chapter 18.1 to 18.3 2 Intrinsic Value vs. Market Value • Intrinsic Value – Self assigned Value – Variety of models used for estimation • Market Price – Consensus value of all potential traders • Trading Signal – IV > MP Buy – IV < MP Sell or Short Sell – IV = MP Hold or Fairly Priced 3 Modern Security Analysis • Graham and Dodd (1934) – “ Security Analysis ” – Valuing shares based on financial statements – Intrinsic value as opposed to market value – Determined by multiplying earnings power by appropriate capitalisation factor • Williams (1938) – “The Theory of Investment Value” – Valuing shares by discounting future dividends, using opportunity cost as discounting factor 4 Modern Security Analysis (2) • Markowitz and Sharpe – Modern Portfolio Theory (MPT) – Investment value not only determined by growth potential, but also by risk – Must be compensated for non-diversifiable risk – Opportunity cost of investing in an equity is a function of non-diversifiable risks 5 Key determinants of share prices • Earnings • Dividends • Risk • Cost of money (risk-free rates) • Growth rates • Etc. • Valuation model : – links forecasts of key determinant/s to a forecasted share price 6 What are we valuing? Value of a business = interests of shareholders and of debt holders • Therefore, if we know value of business and of its debt, we can determine total value of equity • We are interested in market (not book) values! MV(Debt) MV(Equity) (Company) MV MV(Debt)- (Company) MV MV(Equity) Debt Equity 7 What are we valuing? • A share represents a portion of the total equity component of a business • Therefore, by valuing total equity and knowing number of shares in issue, we can determine theoretical value of a share Share is a portion of the equity in the business shares of Number (Equity) Value (Share) Value 8 The sequence… • (When indirectly valuing a share). • The above is not the only method, but often is easier than using “per share” information up front. Value business Subtract MV (Debt) Divide Value of Equity by # Shares 9 Per Share Information vs. Totals • E.g ., Market Cap = Share Price x # Shares • For valuation purposes, total and per share numbers are interconvertible Per Share Total Share Price Market capitalisation Earnings per Share Total earnings Cash Flow per Share Total cashflow 10 Valuation Options • Absolute valuation – use a model based on variables influencing value of asset • Relative valuation – value asset relative to the market values of similar assets 11...
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This note was uploaded on 06/01/2011 for the course FIN 3026W taught by Professor Drtoerien during the Summer '09 term at University of Cape Town.

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L4_Introduction_to_Valuation___DDM - Equity Valuation...

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