Valuation_Topics on Finance

7/26/2019 Valuation_Topics on Finance

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ValuationValuation


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What are Equity Securities?

Equity securities represent ownershipon business.

Give right to participate in the proftabilityo the business.

Have no specifed maturity date (infnitelie)

Equity securities maypay dividendsrom

ater-tax earnings at the discretion o theboard o directors

Give control over the corporation throughvoting rights.


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What is Valuation?

Valuation is the artscience odetermining !hat an assetssecurityis !orth.

"he value o a security or assetdepends on the model#assumptionsand bias.


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What is Valuation?

Valuationgive a oundation ordeciding !hether to buy# sell or held

$hen !e compare the mar%et priceagainst the value# !e can say !hether

a security is over or undervalue.


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Issues on Valuation

IS VALUATION AN OBJECTIVE SEARCH FORTRUE VALUE?

All valuations are biased. The only question

is how much and in which direction.

The direction and manitude o! the bias inyour valuation is directly "ro"ortional to

who "ays you and how much you are "aid.


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Issues on Valuation

IS IT TRUE THAT THE MORE INPUTS IN AMODEL, THE BETTER THE VALUATION?

Sim"ler valuation models do muchbetter than com"le# ones.

$nderstandin valuation is inversely

"ro"ortional to the number o! in"utsrequired !or the model.


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Issues on Valuation

DOES A GOOD VALUATION PROVIDES APRECISE VALUE?

There are no "recise valuations% only ood

or bad estimates.

A valuation without ris& analysis is a badone.

'is& Analysis "rovides a rane o! "ossiblevalues (ma#imum% minimum% mean% standarddeviation% "robability distributions)


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Equity Valuation *odels


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*A'+ET VA,$E *ET-/

"he mar%et value per share is the the price or!hich the share can be traded on the mar%et.

&ar%et price is determined by the orces o supplyand demand and is the same or all investors.

'normation about the frm is reected in mar%etprice by investor)s decisions.

'nvestor)s collective moods# emotions andeelings impact on mar%et price# and that)s !hymar%et price can be overvalued or undervalued.


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0+ VA,$E *ET-/

"his method relies on accounting data included inthe frm)s balance sheet.

"he boo% value per share is equal to the totalshareholders* equity divided by the number oshares outstanding.

+ ma,or disadvantage o this method is the lac%

o consideration o a frm)s earnings potential.

SharesgOutstandinofNumber

EquityrsShareholde=BV


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,I1$I/ATI2 *ET-/

't considers the actual mar%et value that could beobtained i the frm)s assets are sold.

"hen calculates the residual value ater all debts arepaid.

"he residual value is available or distribution toshareholders

"he value o a share is calculated by dividing the residualvalue by the number o outstanding common shares.

"his method does not ta%e into account the earningspotential o the frm.


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/IS3$2TE/ 3AS- 4,W (/34) VA,$ATI2 *ET-/

ocuses on uture ree cash o!s.

"he value o the frm is determined by the stream o cash o!s thatthe operations !ill generate the uture.

"he value can dier among investors depending on ho! optimisticthey are regarding the uture o a frm.

/nder 01 investors ,udge managers) ability to generate ree casho!s in the utures.

V5 6 Value

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/IS3$2TE/ 3AS- 4,W (/34) VA,$ATI2 *ET-/

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14/20

/IS3$2TE/ 3AS- 4,W (/34) VA,$ATI2*ET-/

VA,$E 4 T-E 4I'* 6 :resent Value o! 4ree 3ash 4lows !rom"erations discounted at the Weihted Averae 3ost o! ca"ital

ree cash o!s rom operation (123 are the expected cash o!sgenerated by frm)s operations ater considering the amount oinvestment in !or%ing capital and fxed assets to sustain the businessoperations# but beore payments o debt and interest expenses (!ithoutconsidering ho! the frm is fnanced3

12 are available to debtholders and shareholders that)s !hy must bediscounted at a rate that includes the cost o debt and the cost o equity(!eighted average cost o capital3.

VA,$E 4 E1$IT; 6 :resent value(:V) o! 4ree 3ash 4lowsavailable to Shareholders discounted at the 3ost o! Equity

ree cash o! to shareholder is the cash o! actually available ordistribution to investors ater the frm has made all the investments infxed assets or !or%ing capital necessary to sustain the ongoingoperations# and paid its debt and interest.

VA,$E 4 T-E 4I'* 6 VA,$E 4 E1$IT;


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4'EE 3AS- 4,WS 4'* :E'ATI2 A2/ TS-A'E-,/E'S

4et 'ncome

5 'nterest (6 7 "ax35 0ep. 8 +mort.- 'nvestment in $or%ing 1apital- 'nvestment in ixed +ssets

6 4ree 3ash 4low !rom "erations (443) (7)

- 0ebt 9ayments- 'nterest 9ayments

6 4ree 3ash 4low to Shareholders

(63 +vailable to debtholders and shareholders


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12 shall be discounted at the !eighted average cost ocapital

nV: ; 12t (65%3t 5 "Vt (65%3 t

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Valuation_Topics on Finance