Return Concepts
Holding Period Return (HPR) The HPR is the return earned from investing in an asset for a specified period, and is given by: $$\text{r}=\frac{\text{D}_{\text{H}}}{\text{P}_{0}}+\frac{\text{P}_{\text{H}}-\text{P}_{0}}{\text{P}_{0}}=\frac{\text{D}_{\text{H}}+\text{P}_{\text{H}}}{\text{P}_{0}}-1$$ Where: \(\text{D}_{\text{H}}=\) Investment income, e.g., dividends. \(\text{P}_{\text{t}}=\) Share price at time \(t\). \(\text{P}_{0}=\) Share price at…
Evaluating Corporate Governance Policies and Procedures
Some benefits of effective corporate governance are: Better access to credit. Improved profitability. High returns and growth. Sustainable dividends. Good long-term share performance. Lower cost of capital. Some drawbacks to companies with ineffective corporate governance are: Reputational damage. Reduced competitiveness….
Global Variations in Ownership Structures
Mismanagement of finite resources and environmental degradation from manufacturing processes can lead to corporate events that negatively impact security prices. Therefore, companies have seen the need to integrate such factors in their investment analysis. Dispersed vs Concentrated Ownership Dispersed ownership…
Issues in Model Selection and Interpretation
For a valuation model to be appropriate, it should have the following three characteristics. 1. Consistent with the Company’s Characteristics The selection of a good valuation model requires a good understanding of the business. This includes its assets and how…
Sum of Parts Valuation
The sum-of-parts valuation model values a company by aggregating the estimated value of its different segments valued as if they were independent. The value estimated from this approach is called the breakup value or private market value. This approach is…
Valuation Models
The two major valuation models that are based on the going concern assumption are: Absolute valuation models. Relative valuation models. 1. Absolution Valuation Models These models estimate an asset’s intrinsic value which can be compared to its market price. Absolute…
The Valuation Process
There are five steps involved in the valuation process: Understanding the business. Forecasting company performance. Selecting the appropriate valuation model. Using forecasts in a valuation. Applying the valuation conclusions. 1. Understanding the Business To forecast a company’s financial performance, an…
Applications of Equity Valuation
Equity valuation models and techniques are used to achieve the following: I. Stock Selection Equity valuation is used to determine whether a security is fairly priced, overpriced, or underpriced compared to its intrinsic value and compared to the price of…
