1. 1 Security Valuation and Analysis Macroeconomic/Industry Analysis Security valuation Ratio analysis MBA566: chapter 17-19

2. 2 Factors affecting firm valuation Global economic analysis Domestic Macro-economy Government Policies Industry analysis Company analysis A top-down analysis Fundamental Analysis MBA566: chapter 17-19

3. 3 Performance in countries and regions is highly variable. Political risk Exchange rate risk (Figure 17.1, page 550) Sales Profits Stock returns (Table 17.1, page 549) Global Economic Considerations MBA566: chapter 17-19

4. 4 Gross domestic product Unemployment rates Interest rates & inflation Budget deficit Consumer sentiment Check St. Louis Fed for this set of information Domestic Macroeconomy MBA566: chapter 17-19

5. 5 Either affect the demand side (fiscal policy, monetary policy) or the supply side (improving the incentive of production) of goods and service Demand shock - an event that affects demand for goods and services in the economy. Tax rate cut Increases in government spending Supply shock - an event that influences production capacity or production costs. Commodity price changes Educational level of economic participants The Effect of Government Policy MBA566: chapter 17-19

6. 6 Fiscal Policy - government spending and taxing actions. Monetary Policy - manipulation of the money supply to influence economic activity. Open market operations Discount rate Reserve requirements Supply Side Policies Policies on employment Productivities Economic growth Government Policies MBA566: chapter 17-19

7. 7 Business Cycle Peak Trough Cyclical industries Defensive industries MBA566: chapter 17-19

8. 8 Economic Indicators Economic indicators

9. 9 Useful Economic Indicators MBA566: chapter 17-19

10. 10 Factors affecting sensitivity of earnings to business cycles: Sensitivity of sales of the firm’s product to the business cycles Typically varying across industries Operating leverage Financial leverage Industry life cycles Industry Analysis MBA566: chapter 17-19

11. 11 Effect of Operating Leverage See example 17.1 on page 567 Firms with lower operating leverage do better in recessions MBA566: chapter 17-19

12. 12 Effect of Operating Leverage MBA566: chapter 17-19

13. 13 DOL Degree of operating leverage (DOL) =% change in profit/ % change in sales =1+Fixed costs / Profit Computing DOL for firms A and B MBA566: chapter 17-19

14. 14 Effect of Financial Leverage Financial Leverage Financial leverage hurts in bad years See example 19.1 on page 639 (Table 19.4) MBA566: chapter 17-19

15. 15 Figure 17.6 Returns on Equity, 2005 MBA566: chapter 17-19

16. 16 Figure 17.7 Rate of Return, 2009 MBA566: chapter 17-19

17. 17 Slow growers Stalwarts Fast growers Cyclicals Turnarounds Asset plays (page 572) Industry Life Cycles MBA566: chapter 17-19

18. 18 Industry Life Cycle MBA566: chapter 17-19

19. 19 Sector Rotation Portfolio is adjusted by selecting companies that should perform well for the stage of the business cycle Peaks – natural resource extraction firms Contraction – defensive industries such as pharmaceuticals and food Trough – capital goods industries Expansion – cyclical industries such as consumer durables MBA566: chapter 17-19

20. 20 Industry Structure and Performance Threat of entry Rivalry between existing competitors Pressure from substitute products Bargaining power of buyers Bargaining power of suppliers MBA566: chapter 17-19

21. 21 Balance Sheet Models Book Value Dividend Discount Models Price/Earning Ratios Equity Valuation Models MBA566: chapter 17-19

22. 22 Limitations of Book Value Book value is an application of arbitrary accounting rules Can book value represent a floor value? Better approaches Liquidation value Replacement cost MBA566: chapter 17-19

23. 23 Intrinsic Value (page 606) Self assigned Value Variety of models are used for estimation Market Price Consensus value of all potential traders Trading Signal IV > MP Buy IV < MP Sell or Short Sell IV = MP Hold or Fairly Priced Intrinsic Value and Market Price MBA566: chapter 17-19

24. 24 Value line investment survey report Figure 18.2, page 598 MBA566: chapter 17-19

25. 25 V 0 = Value of Stock D t = Dividend k = required return Dividend Discount Models: General Model

26. 26 Stocks that have earnings and dividends that are expected to remain constant. Preferred Stock No Growth Model

27. 27 E 1 = D 1 = $5.00 k =.15 V 0 = No Growth Model: Example

28. 28 g = constant perpetual growth rate Constant Growth Model

29. 29 E 1 = $5.00b = 40% k = 15% (1-b) = 60%D 1 = $3.00 g = 8% V 0 = Constant Growth Model: Example

30. 30 g = growth rate in dividends ROE = Return on Equity for the firm b = plowback or retention percentage rate (1- dividend payout percentage rate) Estimating Dividend Growth Rates

31. 31 P N = the expected sales price for the stock at time N N = the specified number of years the stock is expected to be held Specified Holding Period Model

32. 32 Example Go through the example 18.1-18.3 from page 592 to 594 MBA566: chapter 17-19

33. 33 b = retention ratio ROE = Return on Equity P/E Ratio with Constant Growth

34. 34 Example 18.4 on page 598. Numerical Example with Growth MBA566: chapter 17-19

35. 35 Summary of Key Financial Ratios MBA566: chapter 17-19

36. 36 Table 19.10 Summary of Key Financial Ratios MBA566: chapter 17-19

37. 37 Table 19.10 Summary of Key Financial Ratios MBA566: chapter 17-19

38. 38 Table 19.10 Summary of Key Financial Ratios MBA566: chapter 17-19

39. 39 Table 19.10 Summary of Key Financial Ratios MBA566: chapter 17-19

40. 40 Figure 19.2 Comparative Accounting Rules MBA566: chapter 17-19