Intrinsic Premium Formula
Intrinsic Value of Equity – Book Value of Equity
Market Premium Formula
Market Value of Equity – Book Value of Equity
Intrinsic Price-to-Book Ratio Formula
Intrinsic Value of Equity / Book Value of Equity
Market Price-to-Book Ratio Formula
Market Value of Equity / Book Value of Equity
Why intrinsic Value/Market Value (of Equity) is often greater than Book Value (of Equity) ?
Goodwill (also internally generated goodwill)
Intangible Asset (not identified in the balance sheet)
Differences between fair value and net carrying amount of assets
Why Market Value may differ from Intrinsic Value?
Information Asimmetry
Differences in forecasts
Speculation / Time Horizon
If FL>FA
Enterprise Value = Equity Value + Net Debt (Value of NFO)
If FA>FL
Enterprise Value + Value of NFA = Equity Value
Operating Activities:
Utilizing operating assets to produce and sell products / to deliver services.
Investing Activities:
• Investing cash in operating assets (CAPEX)
Financing Activities:
Raising cash from shareholders and returning cash to
investors
Raising cash from debtholders and returning cash to
debtholders
Value Added / Stock Return Formula
Value added = Ending Value - Beginning Value + Dividend
Stock Return (Market Value Added) = Pt - Pt-1 + dt
Accounting Value Added Formula
Accounting Value Added (Comprehensive earnings) = Ending book value - Beginning book value + Net payout
Valuation Technologies: Methods that Involve Forecasting
Dividend Discounting: Value is calculated as the present value of expected dividends
Discounted Cash Flow Analysis: Value is calculated as the present value of expected free cash flows
Pricing Book Values (Residual Earnings Analysis): Value is calculated as book value plus the present value of expected residual earnings
Pricing Earnings (Earnings Growth Analysis): Value is calculated as capitalized earnings plus the present value of expected abnprmal earnings growth
Multiple Analysis
A multiple is simply the ratio of the stock price to a particular number in the financial statements.
The most common ratios multiply the important summary numbers in the statements: earnings, book values, sales, EBITDA, and cash flows.
The most common ratios are:
price-earnings ratio (P/E)
A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high grwoth rates in the future
Companies that have no earnings or that are losing money do not have a P/E ratio since there is nothing to put in the denominator
Two kinds of P/E ratios - forward and trailing P/E - are used in practice
price-to-book ratio (P/B)
price-to-sales ratio (P/S)
price-to-cash flow from operations (P/CFO)
Earnings per share (EPS)
Trailing P/E Formula
Trailing P/E = Price per share / Most recent annual EPS
Rolling P/E Formula
Rolling P/E = Price per share / Sum of EPS for most recent four quarters
Forward P/E Formula
Forward P/E = Price per share / Forecast of next year’s EPS
PEG Ratio Formula
PEG ratio = P/E ratio / Earnings growth rate
Unlevered (or Enterprise) Multiples (that are Unaffected by the Financing of Operations)
Enterprise P/B = Enterprise Value / NOA
Enterprise P/EBITDA = Enterprise Value / EBITDA
Levered P/B Ratio Formula
Levered P/B Ratio = Equity Value / Book Value of Equity
Unlevered P/B Ratio (Enterprise P/B Ratio) Formula
Unlevered P/B Ratio (Enterprise P/B ratio) = Equity Value + Value of Net Debt / Book Value of Equity + Net Debt
Capitalization Formula
Value = Expected Return (CF) / Required Return (r)
Required Return (r) Formula
r = Risk-free rate + Risk premium
CAPM Required Return Formula
Required Return = Risk-Free Rate + (Beta + Market Risk Premium)
Where:
Beta is a measure of how a stock’s return moves as the market moves: how sensitive is the stock to the overall market?
The Market risk premium is the amount the market is expected to yield for marketwide risk, so the risk premium for a given stock depends on its beta risk relative to the overall market.
A perpetuity is a constant stream that continues without end. The periodic payoff in the stream is sometimes referred to as an annuity, so a perpetuity is an annuity that continues forever. To value that stream, one capitalizes the constant amount expected. If the dividend expected next year is expected to be a perpetuity, the value of the dividend stream is —> Value (in t0) of a perpetual dividend stream: V0 = d1/r
If an amount is forecasted to grow at a constant rate, its value can be calculated by capitalizing the amount at the required return adjusted for the growth rate —> Value of a dividend growing at a constant rate:
V0 = d1 / r-g
Levered free cash flow (LFCF) is the amount of money a company has left remaining after paying all of its financial obligations.
LFCF is the amount of cash a company has after paying debts, while unlevered free cash flow (UFCF) is cash before debt payments are made.
Levered free cash flow is important because it is the amount of cash that a company can use to pay dividends and make investments in the business.
Formula:
LFCF = C – I - F
or
LFCF = EBITDA - Change in NWC - CapEx - Net payout to Debtholders
Unlevered free cash flow (UFCF) is a company's cash flow before taking interest payments into account.
Unlevered free cash flow shows how much cash is available to the firm before taking financial obligations into account.
UFCF can be contrasted with levered cash flow (LFCF), which is the money left over after all a firm's bills are paid.
UFCF = EBIT - Tax (without Tax Shield) + D&A - Change in NWC - CapEx
Calculation of Free Cash Flow (using OI)
C - I = OI - Change in NOA
that is, free cash flow is operating income adjusted for the change in net operating assets
Calculation of Free Cash Flow (using NFE)
C - I = NFE - Change in NFO + d
that is, free cash flow is net financial expenses, adjusted for the change in net financial obligations, plus dividends to common shareholders.
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