This chapter answers these and other questions and lays a foundation for the remainder of this book. Nonoperating Assets and Firm Value 345 6. Their goal is to create investment processes that can be replicated with some statistical reliability. Intrinsic Value A critical assumption in equity valuation, as applied to publicly traded securities, is that the market price of a security can differ from its intrinsic value. Explain why liquidation value is generally not relevant to estimating intrinsic value for profitable companies. This text has a global orientation, including emerging markets. The following sections explain the major return concepts most relevant to valuation.
Beta Estimation for Thinly Traded Stocks and Nonpublic Companies Analysts do not have access to a series of market price observations for nonpublic companies with which to calculate a regression estimate of beta. Calculate the current value of a share of Sundanci stock using a two-stage dividend discount model and the data from Tables 2-3 and 2-4. The argument concerning a change in dividend payout is incorrect. In a spin-off, the company separates one of its component businesses and transfers the ownership of the separated business to its shareholders. High assumed discount rate for pension liabilities. For many developed markets, equity returns series are now available that are free or nearly free of survivorship bias see Exhibit 2-1.
Investment bankers, corporate analysts, and investment analysts use valuation tools to assess the impact of such corporate events as mergers, acquisitions, divestitures, spin-offs, and going-private transactions. Broad Guidelines for Using a Residual Income Model 5. Finally, the verbal summation is feeble and hedged. Contents of a Research Report 4. Introduction to Free Cash Flows 296 2.
Section 3 presents the chief approaches to estimating the equity risk premium, a key input in determining the required rate of return on equity in several important models. Livent capitalized preproduction costs including expenses for preopening advertising; publicity and promotion; set construction; props; costumes; and salaries and fees paid to the cast, crew, and musicians during rehearsals. Fair Market Value and Investment Value 2. In addition, the shares trade at a discount to book value 0. In Year 4, the investment in operating assets is 30 percent of net income, and debt financing is 40 percent of this investment. Regulatory requirements concerning disclosures and filings vary internationally.
Explain the broad criteria for choosing an appropriate approach for valuing a particular company. The risk beta of Sundanci increases substantially. The primary usefulness of such frameworks is that they can help ensure that an analysis gives appropriate attention to the most important economic drivers of a business. Detailed proofreading was performed by Dorothy C. Your value-oriented investment management company recently hired a new analyst, Bob Westard, because of his expertise in the life sciences and biotechnology areas.
The companies that were selected in 1986 are likely to have been among the most successful of the companies on the exchange as of 1979. Calculate the expected rate of return for each stock using the Gordon growth model. Bias long-term required return on equity estimates downwards. The company can also issue new stock. Asset-Based Approach to Private Company Valuation 545 4.
In prior valuations you have used a risk premium of 3 percent in the bond yield plus risk premium approach. Fair market value is the price at which an asset or liability would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell. Summary 449 References 452 Problems 454 Chapter 8 Residual Income Valuation 463 Learning Outcomes 463 1. Its return on equity is 15 percent. Hansen has a beta of 0. The research note did not discuss how the target price was obtained or how it should be interpreted. Definitions Standards of Value 4.
The authors provide appropriate techniques and the concepts behind them within these covers. The Required Return on Equity: International Issues 79 5. Selecting the Appropriate Valuation Model 18 3. Discuss the uses of valuation models. Valuation Based on the Present Value of Future Cash Flows 233 2.
As another example, analysts can rank each security in a given investment universe by relative attractiveness according to a particular valuation factor. The required rate of return on common stock and debt are also known as the cost 40 Equity Asset Valuation of equity and cost of debt, respectively, taking the perspective of the issuer. The country spread model estimates the equity risk premium as the equity risk premium for a developed market plus a country premium. For individual securities, idiosyncratic risk can overwhelm market risk and, in that case, beta may be a poor predictor of future average return. For example, regulations governing disclosures of conflicts and potential conflicts of interest vary across countries, so an analyst must remain up-to-date on relevant disclosure requirements. Its cost of equity capital is 12 percent, and its tax rate is 40 percent.