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Unformatted text preview: Equity Valuation CFA二级培训项目 讲师:TOM 1-242 TOM • 工作职称:金程教育资深培训师 • 教育背景:南京大学外国语学院 主修英语专业、副修国际金融专业 ;通过CFA三级、中国 注册会计师(CPA)、证券从业资格 • 工作背景:曾就职于安永华明会计师事务所审计部、普华永道企业并购服务部,从事各类 公司的收购兼并工作;现担任某上市公司投资部经理,负责各类大健康行业并购项目。累 计课时超过5000小时,课程清晰易懂,深受学员欢迎。 • 讲授课程:CFA财报、权益、企业、衍生 CPA会计、财管 • 服务客户:中国银行、广发证券、中国建设银行、中国工商银行、交通银行、招商银行、 农业银行、上海银行、太平洋保险、平安证券、富国泰君安等。 2-242 Topic Weightings in CFA Level II Session NO. Content Weightings Study Session 1 Ethical & Professional Standards 10-15 Study Session 2-3 Quantitative Methods 5-10 Study Session 4 Economics 5-10 Study Session 5-6 Financial Reporting and Analysis 10-15 Study Session 7-8 Corporate Finance 5-10 Study Session 9-11 Equity 10-15 Study Session 12-13 Fixed Income 10-15 Study Session 14 Derivatives 5-10 Study Session 15 Alternative Investments 5-10 Study Session 16-17 Portfolio Management 5-15 3-242 Framework SS9: Equity Valuation (1) • R24 Equity Valuation: Applications and Processes Equity valuation • R25 Return Concepts SS10: Equity Valuation (2) • R26 Industry and Company Analysis SS11: Equity Valuation (3) • R27 Discounted Dividend • R28 Free Cash Flow Valuation • R29 Market-Based Valuation: Price and Enterprise Value Multiples • R30 Residual Income Valuation • R31 Private Company Valuation 4-242 Valuation Reading 24 Equity Valuation: Applications and Processes 5-242 Framework 1. Value Definitions and Applications 2. The Valuation Process 3. Quantitative and Qualitative Factors in Valuation 6-242 Value Definitions and Applications Intrinsic value is the value of an asset give a hypothetically complete understanding of the assets’ investment characteristics. Valuation is a part of the active manager’s attempt to production positive excess return. Alpha, an excess risk-adjusted return, also called an abnormal return. VE – P = (V – P) + (VE – V) The first component is the true mispricing, that is, the difference between the true but unobservable intrinsic value V and the observed market price P (this difference contributes to the abnormal return). The second component is the difference between the valuation estimate and the true but unobservable intrinsic value, that is, the error in the estimate of the intrinsic value. 7-242 Value Definitions and Applications Going-Concern Value and Liquidation Value Going-concern value is the value under a going-concern assumption. The valuation models we will cover are all based on the going concern assumption. Liquidation value is the value of a company if the company were dissolved and its assets sold individually. Fair Market Value and Investment Value Fair market value is the price at which an asset (or liability) would change hands between a willing buyer and a willing seller when both of them are not under any compulsion. Investment value is the value to a specific buyer, taking account of potential synergies based on the investor’s requirements and expectations. Under efficient market Liquidation value < intrinsic value = fair market value < investment value 8-242 Value Definitions and Applications Applications of Equity Valuation Stock selection: Check if this security is fairly priced, overpriced, or underpriced relative to its current estimated intrinsic value and relative to the prices of comparable securities. Inferring (extracting) market expectations: Market prices reflect the expectations of investors about the future performance of companies. Analysts can estimate these expectations by comparing the market implied expectations to his own expectations. Evaluating corporate events: Investment bankers, corporate analysts, and investment analysts use valuation tools to assess the impact of such corporate events as mergers, acquisitions, divestitures, spin-offs, and going private transactions. 9-242 Value Definitions and Applications Fairness opinions: The parties to a merger may be required to seek a fairness opinion on the terms of the merger from a third party, such as an investment bank. Evaluating business strategies and models: Companies concerned with maximizing shareholder value evaluate the effect of alternative strategies on share value. Communicating with analysts and shareholders: Valuation concepts facilitate communication and discussion among company management, shareholders, and analysts on a range of corporate issues affecting company value. Appraising private businesses: Valuation of the equity of private businesses is important for transactional purposes and tax reporting purposes among others. 10-242 The Valuation Process General steps in the equity valuation process Understand the business; Forecast company performance; Select the appropriate valuation model; Convert the forecasts into a valuation; Apply the valuation conclusions. 11-242 The Valuation Process Valuation process Step 1: understanding the business Elements of industry structure (Porter’s five forces) Intra-industry rivalry; New entrants; Substitutes; Supplier power; Buyer power. Three generic strategies Cost leadership; Differentiation; Focus. Step 2: forecasting company performance Top-down forecasting approach; Bottom-up forecasting approach. 12-242 The Valuation Process Step 3: selecting the appropriate valuation model Absolution valuation model; DDM, FCFM, residual income approach, asset-based model. Relative valuation model. Multiples, such as P/E, P/B, P/CF, etc. Step 4: converting forecasts to a valuation Two important aspects of converting forecasts to valuation are sensitivity analysis and situational adjustments. Control premium Lack of marketability discounts Illiquidity discounts/ blockage factor Step 5: making the investment decision 13-242 The Valuation Process Sum-of-the-parts valuation Sum-of-the-parts valuation (breakup value or private market value): A valuation that sums the estimated values of each of the company’s businesses as if each business were an independent going concern. Conglomerate discount The market applies a discount to the stock of a company operating in multiple, unrelated businesses compared to the stock of companies with narrower focuses. Three explanations for conglomerate discounts Inefficiency of internal capital markets: companies’ allocation of investment capital among divisions does not maximize overall shareholder value; Endogenous factors: poorly performing companies tend to expand by making acquisitions in unrelated businesses; Research measurement errors: conglomerate discounts do not actually exist, and evidence suggesting that they do is a result of flawed measurement. 14-242 The Valuation Process How does one select a valuation model? Selected models should be Consistent with the characteristics of the company being valued; Appropriate given the availability and quality of data; Consistent with the purpose of valuation, including the analyst’s perspective. 15-242 Reading 25 Return Concepts 16-242 Framework 1. 2. 3. 4. 5. 6. Return Concepts Equity Risk Premium Required Return on Equity International Consideration WACC Discount Rate Selection in Relation To Cash Flow 17-242 Return Concepts Holding period return Holding period return is the return earned from investing an asset over a specified time period. The formula r= P1-P0+D1 D1 P1-P0 = + =dividend yield + price appreciation return P0 P0 P0 Annualized HPR. For example: if the return for one month is 1% then the annualized HPR is (1+0.01)12-1=12.68% 18-242 Return Concepts Realized & expected return Realized return: is the same with HPR. It is backward-looking context. Expected return: in forward-looking, an investor can form an expectation concerning the dividend and selling price. Alpha, an excess risk-adjusted return, also called an abnormal return. Formula Expected alpha(ex ante alpha) = Expected return – Required return Realized alpha(ex post alpha) = Actual holding period return – Contemporaneous required return 19-242 Return Concepts Required return (opportunity cost) The minimum level of expected return that an investor requires in order to invest in the asset over a specific time period, given the assets’ riskiness. It represents A threshold value for being fairly compensated for the risk of the asset; If investor’s expected return > required return, the asset is undervalued; and vice versa. 20-242 Return Concepts Expected return When a asset is mispriced, price of assets converges to its intrinsic value in a period time. The investor’s expected rate of return comprises: Required return; Price to converge to value over his or her time horizon. E(R) rT+ V0-P0 P0 where, V0, there intrinsic value of the stock; P0, the current price of the stock rT, required return during the convergence time period 21-242 Return Concepts Discount rate It is a rate used in finding the PV of future cash flows; Used to determine the intrinsic value depends on the characteristics of the investment rather than that of purchaser. Internal rate of return (IRR) The internal rate of return (IRR) on an investment is the discount rate that equates the present value of the asset’s expected future cash flows to the asset’s price. If price is equal to current intrinsic value, then generally, a discount rate can be found, usually by iteration, which equates that present value to the market price. 22-242 Equity Risk Premium The equity risk premium is the incremental return (premium) that investors require for holding equities rather than a risk-free asset. Equity risk premium = Required return on equity index – Risk-free rate CAPM Required return on share i = Current expected risk-free return + βi (Equity risk premium) Build-up Method Required return on share i = Current expected risk-free return + Equity risk premium ±Other risk premium/discounts 23-242 Equity Risk Premium Historical estimate A historical equity risk premium estimate is usually calculated as the mean value of the differences between broad-based equity-marketindex returns and government debt returns over some selected sample period. Issues in historical estimate Select an appropriate index. In driving the return, an index should be relatively stationary. Time period. The longer the period used, the more precise the estimate; Arithmetic mean or geometric mean (lower) in estimating the return; Risk premium will be lower when geometric mean is used; Long term bond or short term bill is a proxy for the risk-free assets; Industry practice prefer to use longer-term bonds than shorterterm bonds to estimate the risk-free rate. Survivorship bias That results the over-estimate return on index and the ERP. Downward adjustment is used to offset the bias. 24-242 Equity Risk Premium Forward-looking (ex-ante) estimate – conceptual framework ERP is based on expectations for economic and financial variables from the present going forward. It is logical to estimate ERP directly based on current information and expectation. It is not subject to the issues such as non-stationary or data series in historical estimate. But it is subject to potential errors related to models and behavioral bias. 3 approaches Gordon growth model (GGM) estimate; Macroeconomics model estimate; Survey estimate. 25-242 Equity Risk Premium GGM GGM equity risk premium estimate = Dividend yield on the index based on year-ahead aggregate forecasted dividends and aggregate market value + Consensus long-term earnings growth rate – Long-term government bond yield. A simple way to understand the equation ERP=r-RFR= D1 +g-RFR P0 The above equation assumes growth rate is constant. An analyst may make adjustment to reflect P/E boom or bust. Another method to solve these problems Equity Index Price=PVrapid (r)+PVtransition (r)+PVmature (r) 26-242 Equity Risk Premium Supply-Side Estimates (Macroeconomic Model) ERP 1 EINFL 1 EGREPS 1 EGPE 1 EINC Expected changes in the P/E ratio Expected risk free return Expected income component Expected inflation Expected risk-free rate Expected inflation Expected growth in real EPS (1+YTM of 20-year T-bonds) -1 (1+YTM of 20-year TIPS) TIPS: Treasury Inflation Protected Securities Expected growth in real EPS Expected growth in real earning per share=real GDP growth =labor productivity growth rate + labor supply growth rate Survey estimates Use the consensus of the opinions from a sample of people. 27-242 Equity Risk Premium Comparison Estimates Strength • Historical Estimates • • Forwardlooking Estimates • • Weakness • A familiar and popular choice (if reliable long-term records are • available) Unbiased estimate (if no systematic errors has been • made) Objective quality (grounded in • data) Precision issues (due to the reduced/divided length of data) Difficult-to-maintain stationary assumption (if the series starting point extended to the distant past) Empirically countercyclical expected equity risk premium Survivorship bias and positive/negative surprises Available (direct based on • current info. And expectations concerning such variables) Not subject to the issue of nonstationary or data biases • Often subject to other potential errors related to financial/economic models and behavioral biases in forecasting. Subjective 28-242 Equity Risk Premium Comparison Estimates Strength • Popular method; Reasonable when applied to developed economies and markets; Typically sample sources. Supply-Side Estimates • • Proven models; Current information; Survey Estimates • Easy to obtain • • GGM 29-242 Weakness • • Change through time and need to be updated; Assumption of a stable growth rate. • Only appropriate for developed countries; • Wide disparity from different groups Required Return on Equity To estimate the required return on equity, the analyst can choose following models CAPM Multi-factor models Fama-French Model (FFM) Pastor-Stambaugh model (PSM) Macroeconomic Multifactor models Build-up method Bond Yield Plus Risk Premium Method 30-242 Required Return on Equity CAPM model Required return on share i = Current expected risk-free return + βi (Equity risk premium) It’s an equilibrium model based on key assumptions Investors are risk aversion; Investors make investment decision base on the mean return and variance of return of their portfolio. 31-242 Required Return on Equity CAPM model—Beta Estimates for Public Companies Estimating Beta for public company The choice of the index used to represent the market portfolio: For US equities, the S&P 500 and NYSE Composite have been traditional choices. The length of data period and the frequency of observations The most common choice is five years of monthly data, yielding 60 observations; Two years of weekly observations especially appropriate in fast growing markets. Adjusted Beta for Public Companies introduced by Blume Adjusted beta = (2/3) (Unadjusted beta) + (1/3) (1.0); The beta value in a future period has been found to be on average closer to the mean value of 1.0. 32-242 Required Return on Equity Estimating Beta for tiny traded stock or nonpublic companies Step 1: Selecting benchmark company(comparable); Use the public companies’ information in the same industry; Step 2: Estimate the benchmark’s beta (similar with previous section); Step 3: Unlevered benchmark’s beta 1 βU 1+D/E βE Step 4: Lever up the unlevered beta for tiny traded stock or nonpublic companies β ' E 1+ D /E ' β ' 33-242 U Required Return on Equity Multifactor model The beta in CAPM does not describe the risk completely. Multifactor models are develop to account for the risks more completely. Required Return = RF+RP1+RP2++RPn RP=factor sensitivity i factor risk premiumi i Factor sensitivity or factor beta is the asset’s sensitivity to a particular factor (holding all other factors constant), and zero sensitivity to all other factors. 34-242 Required Return on Equity Multifactor model Fama-French Model V.S. Pastor-Stambaugh Model (PSM) RequiredReturn RF imkt ( Rmkt RF ) Small/large cap High/low book-tomarket Low/high liquidity isize ( Rsmall Rbig ) ivalue ( RHBM RLBM ) iliq (RLL - RHL) isize 0, small-cap ivalue 0, value-oriented iliq 0, low-liquidity 35-242 FFM PSM Example: Fama-French Model The estimated factor sensitivities of TerraNova Energy to Fama-French factors and the risk premium associated with those factors are given in the table below. Factor Sensitivity Risk Premium(%) Market Factor 1.20 4.5 Size Factor -0.50 2.7 Value Factor -0.15 4.3 1. Based on the Fama-french model, calculate the required return for TerraNova Energy using theses estimates. Assume that the Treasure bill rate is 4.7 percent. 2. Describe the expected style characteristics of TerraNova based on its factor sensitivities. 36-242 Example: Fama-French Model Correct Answer: 1. r = 4.7%+(1.20x4.5%)+(-0.50x2.7%)+(-0.15x4.3%) = 4.7% + 5.4% 1.35% - 0.645% = 8.1% 2. TerraNova Energy appears to be a large-cap, growth-oriented, high market risk stock as indicated by its negative size beta, negative value beta, and market beta above 1.0. 37-242 Required Return on Equity Macroeconomic multi-factor models A specific example of macroeconomic factor models is the five-factor BIRR model, presented in Burmeister, Roll, and Ross (1994), with factor definitions as follows: Confidence risk: the unanticipated change in the return difference between risky corporate bonds and government bonds, both with maturities of 20 years. Time horizon risk: the unanticipated change in the return difference between 20-year government bonds and 30-day Treasury bills.. Inflation risk: the unexpected change in the inflation rate. Business-cycle risk: the unexpected change in the level of real business activity. Market timing risk: the portion of the total return of an equity market proxy that remains unexplained by the first four risk factors. 38-242 Required Return on Equity Build-up method The basic idea for the required return on equity is ri = risk-free rate + equity risk premium ± one or more premium (discounts) For private business valuation ri = risk-free rate + equity risk premium + size premium + specific-company premium Bond yield plus risk premium method BYPRP cost of equity = YTM on the company’s long-term debt + Risk premium Tips: be careful with the signs of each component and get it through logical deduction. 39-242 Required Return on Equity Comparison of the methods Methods Strength Weakness CAPM • Very simple in that it uses only one factor • Choosing the appropriate factor. • Low explanatory power in some cases Multifactor • Higher explanatory power (not assured) • More complexity and expensive Build-up • Simple • Can apply to closely held companies. • Historical values may not be relevant to current market conditions 40-242 Required Return on Equity Summary of calculations Calculate ERP (equity risk premium) Historical estimate; Forward-looking estimate. GGM estimate; Macroeconomic model estimate; Survey estimate. 41-242 Required Return on Equity Summary of calculations Calculate required rate of return CAPM Actively traded public company; Adjusted Beta; Tiny traded or nonpublic company. Multifactor model Fama-French model (FFM); Pastor-Stambaugh model (PSM); Macroeconomic Multifactor models. Build-up method Bond yield + risk premium. 42-242 International Consideration Exchange rate risk The volatility of exchange rate influences the return on foreign investment in term of home currency. Data and model issues in emerging markets Country spread model: the country premium represents a premium associated with the expected greater risk of the emerging market compared to the benchmark developed market. Equity risk premium = Equity risk premium for a developed market + Country premium Country risk rating model: provides a regression-based estimate of the equity risk premium. The estimated regression equation is then used with the risk ratings for less developed markets to predict the required return for those markets. 43-242 WACC The cost of capital is most commonly estimated using the company’s aftertax weighted average cost of capital, or weighted average cost of capital (WACC) fo...
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