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CHAPTER 13. EQUITY VALUATION CHAPTER 13. EQUITY VALUATION Basic Definitions: Book Value is the net worth of a company as reported on its balance sheet. Current market price of stocks of companies can sell below their book value. The liquidation value per share is the net amount that can be realized by selling the assets of a firm and paying off the debt. Replacement cost is the cost to replace a firm’s assets. Intrinsic Value vs Market Price Intrinsic value is the present value of a firm`s expected future net cash flows discounted by the required rate of return. Expected Holding Period Return (HPR) = E(r) = ( 29 ( 29 [ ] 0 0 1 1 P P P E D E - + Where E (D 1 ) = expected dividend per share E (P 1 ) = expected price of a share at the end of period P 0 = current price of a share Intrinsic Value using a one year investment horizon: ( 29 ( 29 k P E D E V + + = 1 1 1 0 Where V 0 = intrinsic value r = required rate of return
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