1. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods 18 th February 2016 Don Chng, Kelvin Tan, Liu Zhihao FA Department

2. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods 1 8 th February 2016 Don Chng, Kelvin Tan, Liu Zhihao FA Department Disclaimer NUS Invest is in no way affiliated or representative of any other company, organisation, club or society, and the views presented are solely our own opinions. The author(s) is not a licensed investment advisor. Our services are educational tools designed to assist you in your personal judgment. It is not designed to replace your licensed financial consultant, and nothing in the content shall be construed to be an offer or solicitation for the purchase or sale of a security. All content on our website and related services is for informational purposes only, and opinions have been made on a general basis. No consideration has been given to any particular individual or specific investment objectives, financial situations or other circumstances. As such, the content should not be relied upon as authoritative without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that the content has been made available constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described within is suitable or appropriate for the reader. Readers should be aware that many of the products which may be described within involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made unless all such risks are understood and an independent determination has been made that such transactions would be appropriate.

3. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods 18 th February 2016 Don Chng, Kelvin Tan, Liu Zhihao FA Department Introduction What is Valuation? “Valuation is the process of determining the current worth of an asset.”

4. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods 18 th February 2016 Don Chng, Kelvin Tan, Liu Zhihao FA Department Scenario Internship Auction  Goldman Sachs will be offering a single internship slot to the people in this room.  Can choose to work in any department of your choice.  Highest Bidder gets the internship.

5. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods 18 th February 2016 Don Chng, Kelvin Tan, Liu Zhihao FA Department Scenario Internship Auction Based on the following scenario, How much are you willing to bid for an internship from GS? A.Less than $200 B.Between $200 to $500 C.Between $500 to $1000 D.More than $1000

6. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods 18 th February 2016 Don Chng, Kelvin Tan, Liu Zhihao FA Department Scenario Valuation is based on other people’s bids Comparison with other internship offers Valuation is based on potential future earnings with a Goldman Sachs Internship in your CV

7. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods 18 th February 2016 Don Chng, Kelvin Tan, Liu Zhihao FA Department Morale of the story

8. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Agenda Relative Valuation Dividend Growth Modelling Discounted Cash Flow Modelling 18 th February 2016

9. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Relative Valuation Relative Valuation in a nutshell: The value of any asset can be gauged by comparing how the market prices assets that are similar in nature. 18 th February 2016

10. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Financial Ratios 18 th February 2016 Earnings Multiples:  Price/ Earnings, Earnings Per Share Asset (Value) Multiples:  Value/ EBITDA, Value/ Cash Flow Debt Ratios:  Debt Ratio, Debt/ Equity, Quick Ratio Industry Specific Ratios:  Price/ kwh, Price/ Labour Hours, Price/ Click

11. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Relative Valuation Comparison between 3 companies within the Soft Drinks Industry: 18 th February 2016 Coca-ColaPepsi Monster

12. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Relative Valuation 18 th February 2016

13. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Relative Valuation Would you want to invest in:  Coca-Cola because of its high dividend payout?  Pepsi because of its low Price/ Free Cash Flow Ratio?  Monster because of its high earnings and no- debt capital structure? 18 th February 2016

14. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Relative Valuation Limitations:  Key Assumption – Market is fully efficient; business is priced correctly  Only can be used to compare companies within the same industry. Does not take into account the economic performance of the industry as a whole. 18 th February 2016

15. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Relative Valuation Dividend Growth Modelling Discounted Cash Flow Modelling 18 th February 2016

16. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model Dividend Growth Model in a nutshell: “A model for determining the intrinsic value of a stock, based on a future series of dividends” 18 th February 2016

17. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 Developing the model: Suppose you are thinking of purchasing a stock and you expect it to pay a $2 dividend in 1 year and you believe that you can sell the stock for $14 at that time. If you require a return of 20% on investments of this risk, what is the maximum you would be willing to pay?

18. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 Developing the model: 01 2 3 20% P 1 =14 P 0 = $16 / 1.20 D 1 =$2 + $16

19. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 Developing the model: Now what if you decide to hold the stock for 2 years? In addition to the dividend in one year, you expect a dividend of $2.10 and a stock price of $14.70 at the end of year 2. Now how much would you be willing to pay?  PV = 2 / (1.2) + (2.10 + 14.70) / (1.2) 2 = 13.33

20. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 Developing the model: You could continue to delay when you would sell the stock

21. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 3 Cases: Dividend Growth Model Zero Growth Constant Growth Supernormal Growth

22. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 Constant Dividend Model: Stock A has constant dividend of $2 and a 13% co st of equity Stock price today = 2 / 0.13 = $15.38

23. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 Constant Growth Model: Stock B pays a $2 dividend in the current year a nd is expected to grow 3% a year Stock price today = 2 / (0.13 – 0.03) = $20

24. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 When to use Constant Growth Model? Best suited for firms growing at a rate comparable to no minalgrowth in the economy and have well established d ividend payout policies that they intend to continue into the futur e Example: REITs usually consistently pay out 90% of th eir Net Income in dividends to avoid being taxed

25. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 Supernormal Growth Model: 01234 13% g = 30% g = 6%... D 0 = 2.00 2.600 3.380 4.394D 0 = 2.00 2.600 3.380 4.394 4.658 P 0 = 54.11 2.301 2.647 3.045 46.118 66.543 DGM Discount back by 3 periods rErE g A firm expects supernormal growth of 30% for 3 years, then a long-run constant g = 6%.

26. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model 18 th February 2016 When to use Supernormal Growth Model? Best suited for firms which are in high growth and expect to maintain that growth rate for a specific time period, after wh ich sources of high growth disappear Example: Company has patent rights to a profitable product and expects to enjoy supernormal growth during this period such as healthcare companies with patented drugs

27. NUS Invest nusinvest.com DISCLAIMER AND DISCLOSURES Please read the disclaimer and the disclosures which can be found within this report Valuation Methods Don Chng, Kelvin Tan, Liu Zhihao FA Department Dividend Growth Model Limitations of the model: 18 th February 2016 Limited to firms who pay dividends (Eg: REITs, Blue chip stocks) Assumes that dividends are steady or grow at a constant rate indefini tely High growth problem. Growth rate cannot exceed rate of return Unrealistically implies that growth stocks (Example: Microsoft) are worthless