548-Week 7 MBA.PM Spring 2010

548-Week 7 MBA.PM Spring 2010 - Valuation of Common Stock...

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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Valuation of Common Stock Risks and Returns of Investments Week 7: April 12 and 14 (LA) April 13 and 15 (OCC)
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Who Values Stocks? Stock analysts as discussed first week - buy side, sell side focus on stock research Strategy departments of corporations and others value companies in close parallel to stock analysts except for control issues and integrating strategic changes into intrinsic value calculations Problem is always to estimate future cash flows and choose risk-adjusted discount rate
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Fundamental vs. Technical Analysis of Stocks Fundamental analysis depends on thorough analysis of a firm’s business and prospects This approach is associated with Graham and Dodd, Warren Buffett, and Koller et al Valuation book Technical analysis depends on patterns in prices over time Academic research supports the use of fundamental analysis
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Fundamental Analysis Fundamental approach is used by Value Line Investment Survey, one example of fundamental analysis used by many firms Fundamental analysis requires research and analysis of a firm’s past performance and estimates of future performance Can find many examples of stock research in the Investext database at Marshall Library » Choose “Electronic Resources” then select “Investext” from the menu, enter ticker symbol or name and check appropriate box on the next page; select reports or “Complete Reports List” from right side of next page
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Comparables or Benchmarks Analysis cannot take place in a vacuum; an analyst needs to compare firms to assess past and future likely performance Simple valuation strategies rely on assumptions based on “market comparables” Compare similar firms’ price-earnings ratios Compare similar firms’ market-to-book ratios Compare other measures, like price to EBITDA or sales or market value divided by # of PhDs
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Common Short-Cuts to Stock Valuation Project next year’s income and multiply by an assumed future price-earnings ratio derived from market comparables Project next year’s book value of equity (current book value of equity plus retained earnings and new issues minus repurchases) and apply comparables’ market-to-book ratio Similarly for other ratio comparables
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010 Choosing Comparables Stocks values reflect specific firm (or idiosyncratic), industry, and general economic factors A stock index can reflect performance common in a class of stocks (e.g. retail) Stock indices and related statistics (e.g. PE ratio or dividend yield) provide benchmarks Stocks and indices are classified as blue chip, growth , value, small caps, or cyclical stocks , and others, by market observers
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J. K. Dietrich - GSBA 548 – MBA.PM Spring 2010
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This note was uploaded on 02/11/2012 for the course FBE 443 taught by Professor Imrohoroglu during the Spring '07 term at USC.

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548-Week 7 MBA.PM Spring 2010 - Valuation of Common Stock...

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