Section _3 Valuation - AEM 3240 Section #3 Stock Valuation...

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AEM 3240 Section #3 Stock Valuation September 14th, 2010 Copyright 2010 by Rich Curtis
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What is the value of any asset derived from?
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Common Stock Valuation 1. Based on Discounted Cash Flows a. What cash flows? b. What discount rate? 2. Based on Multiples of Key Financial Variables For Comparable Companies a. Based on a multiple of earnings b. Based on a multiple of EBITDA c. Based on a multiple of book value d. Based on a multiple of sales e. Based on a multiple of “free cash flow” 3. Based on Option Theory 4. Based on Earnings and Estimated Growth
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5. Based on the Breakup Value of the Firm 6. Based on the Replacement Value of the Firm’s Assets 7. Based on the Estimated Value of the Firm After Financial Restructuring 8. Based on “Castles In The Air” … The Greater Fool Theory 9. Industry-Specific Methods a. Based on the “number of subscribers” or “customers” b. Based on the population in the selling area (price per “pop”) c. Based on number of “eyeballs” or “clicks” d. Etc.
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1. Common Stock Value As Estimated By Dividend Discount Models (See “Stock Valuation” Notes, pp. 15-16) P o = D 1 1+k e + D 2 1+k e Λ Ν Μ Ξ Π Ο 2 + D 3 1+k e Λ Ν Μ Ξ Π Ο 3 + . ..
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If those dividends growth at a constant rate g, then P o = D 1 1+k e + D 2 1+k e Λ Ν Μ Ξ Π Ο 2 + D 3 1+k e Λ Ν Μ Ξ Π Ο 3 + . .. = D 1 1+k e + D 1 1+g Λ Ν Μ Ξ Π Ο 1+k e Λ Ν Μ Ξ Π Ο 2 + D 1 1+g Λ Ν Μ Ξ Π Ο 2 1+k e Λ Ν Μ Ξ Π Ο 3 + . .. and if k e > g, P o = D 1 k e g
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Example : MRK: If D 1 = $1.52 = 4($.38), k e = .1061, and g = .0549, then P o = D 1 k e g = $1.52 .1061 - .0549 = $29.6875 From Bloomberg
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CAPM: E[R j ] = R f + β j (E[R m ]-R f ) 10-Yr. T-Bond Assumed Key Statistics or Bloomberg E[R j ] = R f + β j (E[R m ]-R f ) = R f + (.916)(E[R m ]-R f ) Raw Beta = .874 Adj Beta = .916
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2. Common Stock Price Estimates Based On Comparable Firms (See “Stock Valuation” Notes, pp. 35-45) One problem with DCF models is that k e and g can be difficult to estimate, and P 0 is very sensitive to these variables. It would therefore be nice to have some other valuation methods which use variables which are easier to estimate.
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Analogy : My height is 69 inches. What’s my weight? Some data (from guys):
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This note was uploaded on 09/24/2011 for the course HADM 2225 taught by Professor Wellman, j during the Spring '08 term at Cornell University (Engineering School).

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Section _3 Valuation - AEM 3240 Section #3 Stock Valuation...

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