Industry and Firm-Specific Analysis

Industry and Firm-Specific Analysis - INDUSTRY ANALYSIS AND...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
INDUSTRY ANALYSIS AND EQUITY VALUATION MODELS 1. Industry Analysis a) The Business cycle and transition points: - Trough : economy recovery begins - Peak: entering recession b) Sensitivity to the Business cycle depends on: 1) sales, 2) operating leverage, and 3) financial leverage. c) Industry/Firm Life Cycle: - Start-up: new technology, high risk - Consolidation: survivors are more stable - Maturity: product reaches full potential - Decline: slow or no growth, competition or obsolete product 2. Firm-specific Analysis a) How do we choose stocks within an industry? b) Equity Value Definitions: Book Value : the net worth from the Balance sheet Liquidation Value: the value of the firm if broken up and sold off (after paying out all obligations) Replacement Cost: cost to replace all assets less the value of liabilities 1 Sales Rapid or Increasing Growth Stable Growth Slowing Growing Minimal or Negative Growth Start up Consolidation Maturity Decline Age
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Tobin’s q = Market price /Replacement cost /q > 1, q < 1/ c) In order to determine the V comp we have to move away from the Balance sheet and actually forecast cash value Market value : the price at which a security is currently trading Intrinsic value : the formula for one period is: k P E D E V + + = 1 ) ( ) ( 1 1 - How to determine ‘k’? Use, for example, CAPM - The market’s consensus of ‘k’ is the market capitalization rate - Intrinsic value is calculated as the PV of all cash payments (D 1 and P 1 ) Class example 1: E(R) = 6% + 1.2(5%) = 12% - required rate of return If D 1 = $4, and P 1 =$52 - expected value, then intrinsic value is: 50 12 . 0 1 52 4 = + + = 0 V V 0 = $50 > $48 (market price), so BUY HPR = ? ) ( % 6 . 16 48 4 48 52 R E HPR = + - = In the example we suggested that the market is inefficient, because the market price is below the intrinsic value ($50 > $48). 3. Growth Opportunities (Estimating “g”) a) Earning retention ratio ( b ) is the proportion of earnings not paid out in dividends but instead reinvested in the firm b) A firm that has good investment (growth) opportunity should reinvest earnings in the firm rather than pay dividends out.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/25/2011 for the course FINA 4320 taught by Professor John during the Spring '11 term at Houston Baptist.

Page1 / 10

Industry and Firm-Specific Analysis - INDUSTRY ANALYSIS AND...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online