Present Value Models to Value Equity
Present value models are based on a fundamental tenet of economics stating that individuals defer consumption to reap future benefits. Therefore, the value of an investment today should be worth the present value of expected future benefits, defined as dividends…
Intrinsic Value of a Preferred Stock
The intrinsic value of a non-callable, non-convertible preferred stock can be calculated in much the same way as a share of common stock, except the expected sales price is replaced by the par value of the preferred shares. $$ V_0=\sum_{t=1}^n\frac{D_t}{(1+r)^t}+\frac{F}{(1+r)^n}$$…
Gordon (Constant) Growth Dividend Discount Model and Two-stage Dividend Discount Model
Gordon (Constant) Growth Dividend Discount Model As the name implies, the Gordon (constant) growth dividend discount model assumes dividends grow indefinitely at a constant rate. $$ V_0=\frac{D_1}{r-g} $$ Where: \(D_1\) = expected dividends in year 1 Note that this is…
Multistage Dividend Discount Model
The Gordon (constant) growth dividend discount model is particularly useful for valuing the equity of dividend-paying companies that are insensitive to the business cycle and in a mature growth phase. On the other hand, multistage models are often used to…
Using Price Multiples to Value Equity
The use of price multipliers to earnings, book value, and sales have all shown to have significant predictive value in determining relative future returns, implying that price multiples can be an effective tool for the valuation of companies. In addition,…
Price Multiples
The concept of price multiples refers to ratios that compare a company’s share price with a financial metric, allowing for an assessment of the stock’s relative value. These ratios are commonly used by practitioners for screening purposes, identifying stocks for…
Enterprise Value Multiples
Enterprise value (EV), often viewed as the cost of a takeover, is most frequently determined as market capitalization plus the market value of preferred stock plus the market value of debt minus cash equivalents and short-term investments. EV/EBITDA EBITDA (earnings before interest,…
Asset-based Valuation Models
An asset-based valuation of a company uses estimates of the market or fair value of the company’s assets and liabilities and, thus, is most appropriate for companies with a high proportion of current assets and current liabilities and few/insignificant intangible…
Categories of Valuation Model
Free Cash Flow to Equity (FCFE) Model Advantages: aims to calculate a company’s capacity to pay future dividends, going beyond simply discounting expected dividends. This approach may provide a more useful valuation, especially when the company does not pay dividends…
CFA Level 1 Study Notes – Corporate Issuers
CFA Level 1 Study Notes 2020 Reading 31- Corporate Governance and ESG: An Introduction – LOS a : describe corporate governance – LOS b: describe a company’s stakeholder groups and compare interests of stakeholder groups – LOS 31c: describe principal–agent…
