Presentation is loading. Please wait.

Presentation is loading. Please wait.

Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-1 Chapter 14.

Published byPenelope Horn Modified over 8 years ago

Similar presentations

Presentation on theme: "Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-1 Chapter 14."— Presentation transcript:

1 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-1 Chapter 14

2 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-2 Chapter Summary  Objective: Introduction to fundamental stock analysis. This chapter introduces different types of valuation models and shows how economic conditions affect the results. Dividend discount models Price-Earnings ratios Other methods and issues Macroeconomic analysis

3 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-3  Basic Types of Models Balance Sheet Models Dividend Discount Models Price/Earning Ratios  Estimating Growth Rates and Opportunities Fundamental Analysis: Models of Equity Valuation

4 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-4  Intrinsic Value 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

5 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-5 Summary Reminder  Objective: Introduction to fundamental stock analysis. This chapter introduces different types of valuation models and shows how economic conditions affect the results. Dividend discount models Price-Earnings ratios Other methods and issues Macroeconomic analysis

6 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-6 V 0 = Value of Stock D t = Dividend k = required return Dividend Discount Models: General Model

7 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-7  Stocks that have earnings and dividends that are expected to remain constant  Preferred Stock No Growth Model

8 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-8 E 1 = D 1 = $5.00 k =.15 V 0 = $5.00 /.15 = $33.33 No Growth Model: Example

9 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-9 g = constant perpetual growth rate Constant Growth Model

10 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-10 E 1 = $5.00b = 40% k = 15% (1-b) = 60%D 1 = $3.00 g = 8% V 0 = 3.00 / (.15 -.08) = $42.86 Constant Growth Model: Example

11 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-11 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

12 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-12 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

13 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-13 PVGO = Present Value of Growth Opportunities E 1 = Earnings per share for period 1 Partitioning Value: Growth and No Growth Components

14 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-14 ROE = 20% d = 60% b = 40% E 1 = $5.00 D 1 = $3.00 k = 15% Partitioning Value: Example g =.20 x.40 =.08 or 8%

15 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-15 Vo = value with growth NGVo = no growth component value PVGO = Present Value of Growth Opportunities Partitioning Value: Example (cont’d)

16 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-16 Summary Reminder  Objective: Introduction to fundamental stock analysis. This chapter introduces different types of valuation models and shows how economic conditions affect the results. Dividend discount models Price-Earnings ratios Other methods and issues Macroeconomic analysis

17 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-17  P/E Ratios are a function of two factors Required Rates of Return (k) Expected growth in Dividends  Uses Relative valuation Extensive Use in industry Earnings, Growth and Price-Earnings Ratios

18 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-18  E 1 - expected earnings for next year E 1 is equal to D 1 under no growth  k - required rate of return P/E Ratio: No Expected Growth

19 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-19 b = retention ratio ROE = Return on Equity P/E Ratio with Constant Growth

20 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-20 E 0 = $2.50 g = 0 k = 12.5% P 0 = D/k = $2.50/.125 = $20.00 PE = 1/k = 1/.125 = 8 Numerical Example: No Growth

21 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-21 E 1 = $2.50 (1 + (.6)(.15)) = $2.73 D 1 = $2.73 (1-.6) = $1.09 P 0 = 1.09/(.125-.09) = $31.14 PE = 31.14/2.73 = 11.4 PE = (1 -.60) / (.125 -.09) = 11.4 Numerical Example with Growth b = 60% ROE = 15% (1-b) = 40% k = 12.5% g = 9%

22 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-22 Pitfalls in P/E Analysis  Use of accounting earnings Historical costs May not reflect economic earnings  Reported earnings fluctuate around the business cycle

23 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-23 Summary Reminder  Objective: Introduction to fundamental stock analysis. This chapter introduces different types of valuation models and shows how economic conditions affect the results. Dividend discount models Price-Earnings ratios Other methods and issues Macroeconomic analysis

24 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-24 Other Valuation Ratios  Price-to-Book  Price-to-Cash-Flow  Price-to-Sales

25 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-25 The Free Cash-Flow Approach  Fundamental idea: the intrinsic value of a firm is the present value of all its net cash-flows to shareholders  Estimate the value of the firm as a whole It equals the present value of cash-flows, assuming all-equity financing plus the net present value of tax shields created by using debt;  Derive the value of equity by subtracting the market value of all non-equity claims

26 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-26 Inflation and Equity Valuation  Inflation has an impact on equity valuations  Historical costs underestimate economic costs  Empirical research shows that inflation has an adverse effect on equity values Research shows that real rates of return are lower with high rates of inflation

27 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-27 Potential Causes of Lower Equity Values with Inflation  Shocks cause expectation of lower earnings by market participants  Returns are viewed as being riskier with higher rates of inflation  Real dividends are lower because of taxes

28 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-28 Growth or Value Investing  Growth Investing – picking companies that are considered to have superior growth prospects  Value Investing – choosing companies for which fundamental analysis reveals unrecognized value  The Graham technique

29 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-29 Summary Reminder  Objective: Introduction to fundamental stock analysis. This chapter introduces different types of valuation models and shows how economic conditions affect the results. Dividend discount models Price-Earnings ratios Other methods and issues Macroeconomic analysis

30 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-30  Performance in countries and regions is highly variable  Political risk  Exchange rate risk Sales Profits Stock returns Global Economic Considerations

31 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-31  Gross domestic product (GDP)  Unemployment rates  Interest rates & inflation  International measures  Consumer sentiment Key Economic Variables

32 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-32  Fiscal Policy - Government spending and taxing actions  Monetary Policy - manipulation of the money supply to influence economic activity  Tools of monetary policy Open market operations Discount rate Reserve requirements Government Policy

33 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-33  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 Demand and Supply Shocks

34 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-34  Business Cycle Peak Trough  Industry relationship to business cycles Cyclical Defensive Business Cycles

35 Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-35  Leading Indicators - tend to rise and fall in advance of the economy. Examples: Average work week New orders - durables Residential construction Stock Prices  Lagging Indicators - indicators that tend to follow the lag economic performance Cyclical Indicators

Download ppt "Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 14-1 Chapter 14."

Similar presentations

Shino Takayama The University of Sydney Faculty of Business and Economics Ch 18. Equity Valuation Model.

Shino Takayama The University of Sydney Faculty of Business and Economics Ch 18. Equity Valuation Model.
Chapter 13 Equity Valuation 13-2 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 Fundamental Stock Analysis: Models of Equity Valuation Basic.

Chapter 13 Equity Valuation 13-2 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1998 Fundamental Stock Analysis: Models of Equity Valuation Basic.
Equity Valuation Models

Equity Valuation Models
Common Stock Valuation

Common Stock Valuation
Equity Valuation CHAPTER 12.

Equity Valuation CHAPTER 12.
1 FIN 2808, Spring 10 - Tang Chapter 18: Equity Valuation Fin2808: Investments Spring, 2010 Dragon Tang Lectures 13 & 14 Equity Valuation Models March.

1 FIN 2808, Spring 10 - Tang Chapter 18: Equity Valuation Fin2808: Investments Spring, 2010 Dragon Tang Lectures 13 & 14 Equity Valuation Models March.
FIN352 Vicentiu Covrig 1 Common Stock Valuation (chapter 10)

FIN352 Vicentiu Covrig 1 Common Stock Valuation (chapter 10)
INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 17 Macroeconomic and.

INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 17 Macroeconomic and.
1 1 Ch17, 18, 19 – MBA 566 Security Valuation and Analysis Macroeconomic and Industry Analysis/Fundamental Analysis Equity Valuation Ratio analysis.

1 1 Ch17, 18, 19 – MBA 566 Security Valuation and Analysis Macroeconomic and Industry Analysis/Fundamental Analysis Equity Valuation Ratio analysis.
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Equity Valuation CHAPTER 13.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Equity Valuation CHAPTER 13.
Chapter 9 An Introduction to Security Valuation. 2 The Investment Decision Process Determine the required rate of return Evaluate the investment to determine.

Chapter 9 An Introduction to Security Valuation. 2 The Investment Decision Process Determine the required rate of return Evaluate the investment to determine.
 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 17-1 Macroeconomic and Industry Analysis Chapter.

 The McGraw-Hill Companies, Inc., 1999 INVESTMENTS Fourth Edition Bodie Kane Marcus Irwin/McGraw-Hill 17-1 Macroeconomic and Industry Analysis Chapter.
Economy / Market Analysis

Economy / Market Analysis
Equity Valuation Models Chapter 18. Basic Types of Models - Balance Sheet Models - Dividend Discount Models - Price/Earning Ratios Estimating Growth Rates.

Equity Valuation Models Chapter 18. Basic Types of Models - Balance Sheet Models - Dividend Discount Models - Price/Earning Ratios Estimating Growth Rates.
Chapter 13 Equity Valuation

Chapter 13 Equity Valuation
Copyright ©2004 Pearson Education, Inc. All rights reserved. Chapter 14 Stock Analysis and Valuation.

Copyright ©2004 Pearson Education, Inc. All rights reserved. Chapter 14 Stock Analysis and Valuation.
Macroeconomics and Industry Analysis, BKM Ch 17

Macroeconomics and Industry Analysis, BKM Ch 17
Equity Valuation Models

Equity Valuation Models
Fall-02 Investments Zvi Wiener tel: 02-588-3049 Equity Valuation Methods BKM Ch.

Fall-02 Investments Zvi Wiener tel: Equity Valuation Methods BKM Ch.
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Macroeconomic and Industry Analysis CHAPTER 12.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Macroeconomic and Industry Analysis CHAPTER 12.

Similar presentations

Ads by Google