L13 - Ch12 Equity Valuation Value vs Price When is value...

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•1 Investment analysis, Prof. Peng 1 Ch12. Equity Valuation ¾ Value vs. Price: When is value valuable ? ¾ Dividend Discount Model (DDM) ± How does dividend discount model work? ± Where does dividend growth come from? ¾ Earnings and P/E ratio (P/E) Investment analysis, Prof. Peng 2 Intrinsic value vs. market price ± What is Intrinsic value? ¾ The present value of expected net future cash flows, discounted by the required rate of return ¾ Subjective: only as good as the model in which it is derived and the input which goes into the model ± What is Price? ¾ The average of the intrinsic value of all market participants ± Can the Value and Price be Different? ¾ Absolutely! ± Market inefficiency ± Heterogeneous valuation ± Asymmetric information ± Show me the money ¾ Buy undervalued and sell overvalued stocks
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•2 Investment analysis, Prof. Peng 3 How to find the intrinsic value? ± Dividend Discount Model ¾ the intrinsic value is the present value of future cash flows ¾ Two Critical Inputs: ± Future cash flows ¾ Q :. IBM is forecasted to pay $4 dividend at the year end, and have 12 month price target of $52. What is the stock value today? ¾ A : the value of the IBM stock is the present value of the future cash flows, i.e. ± k : The market capitalization rate (cost of equity, required return) ¾ If k = 12%, stock value: ¾ k in general depends on the risk-ness of the cash flows, ± e.g. CAPM or factor models (later) k V E D E V + + = 1 ] [ ] [ 1 1 0 50 12 . 1 52 4 1 ] [ ] [ 1 1 0 = + = + + = k V E D E V Investment analysis, Prof. Peng 4 Dividend Discount Model ± More General Setup ¾ Convention: use ex-dividend value/price () 2 2 2 2 1 0 1 ] [ 1 ] [ 1 ] [ k V E k D E k D E V + + + + + = k V E D E V E + + = 1 ] [ ] [ ] [ 3 3 2 k V E D E V E + + = 1 ] [ ] [ ] [ 2 2 1 k V E k D E k V E D E V + + + = + + = 1 ] [ 1 ] [ 1 ] [ ] [ 1 1 1 1 0 D 1 V 0 2 3 4 = + = + + + + + + = 1 2 2 1 1 0 ) 1 ( ) ( ) 1 ( ) ( ...
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This note was uploaded on 08/26/2011 for the course ECO 220 taught by Professor Huang during the Spring '08 term at CUNY Hunter.

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L13 - Ch12 Equity Valuation Value vs Price When is value...

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