Pengantar Penilaian Efek
(Introduction to Security Valuation)
Pertemuan 3-4
Two General Approaches to
Valuation Process
1. The top-down, three step approach;
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Start with your forecast of the direction
of the general economics (Economic
analysis)
Based upon your economic forecast,
project the outlook for each industry
under review (industrial analysis)
Third, within each industry, select the
firm you feel will perform the best given
your economic and industry forecast
(stock analysis).
Two General Approaches to
Valuation Process
2. The bottom up, stock picking approach

Selecting stock which investor believe
are underpriced without considering the
direction of economy and state of the
industry.
Fundamental differences between two approaches is how
investors perceive the importance of economic and
industry influences on individual stock returns
Economic Analysis (1)

Fiscal policy is a direct approach aimed at
overall demand in an attempt to manage
the rate of economic growth. Tax cut
encourage spending (demand) and speed up
the economy; tax increases discourage
spending and slow down the economy.
Government spending creates job, thus
increasing overall demand.
Economic Analysis (2)

Monetary policy is an indirect method used by
the government to manage the rate of
economic growth. Decreasing the money
supply cause interest rate to rise, putting
upward pressure on cost and downward
pressure on demand.
Inflation can result from increasing money
supply to fast. Rising interest rates reduces
the demand for investment funds and rising
consumer prices reduces product demand.
Industry Analysis
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Consider how these industries react to
economic changes.
Some industries are cyclical, some are
counter-cyclical and some are noncyclical.
Consider global economic shifts: an industry’s
prospect within the global business
environment determine how well or poorly
individual firms in the industry will do.
Company Analysis


Compare firms within each industry
using financial ratios and cash flow
analysis.
This involves not only examining the
firm’s past performance, but also its
future prospects.
Valuation theory


The value of an assets is the present
value (PV) of the asset’s expected
(future) cash flows.
Valuation theory study two process
1. Valuation Process
2. Investment decision process
Valuation process

Valuation process involves two basic steps
1. Estimate the stream of expected returns,
must considered two things:
1. Form of returns, and
2.
Time pattern of return
2. Estimate the required rate of return,
The required rate is a function of the real rate
of interest plus an inflation premium and a risk
premium
Returns

Investment returns can take two possible
forms :
1.
Capital gains yield (price changes),
This is the percentage increase or decrease in
the price of an investment and includes gains or
losses due to changes in exchange rates.
2. Current yield.
Based on actual cash received during the
investment horizon and is typically composed of
dividends and interest. Usually stated as a
percent of price and is called the coupon yield
for bonds and the dividend yields for equities
Returns and Investment type

Common Stock
Total return are Dividend yield + Capital Gains yield.

Bonds

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Bonds that selling at par value:
Total return only a coupon yield
Bond that selling at premium/discount:
Total return are coupon yield + capital gain/loss
Preffered Stock

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Selling at par value  return = dividend yield
Selling at premium/discount 
return = dividend yield + capital gain/loss
EXAMPLE 1
(estimate the stream of expected return)
Calculate the expected returns for the stock.
Its current price is $ 25. Its next expected
dividend is $ 1. And you expect to sell it for $
27 in one year.
Answer:
Dividend yield: D1/P0 = 1/25 = 0.04 = 4%
Capital gains yield = (P1/P0) – 1 =(27/25) – 1 =
0.08 = 8%
Total expected returns =Dividend yield + capital
gain yield
= 4% + 8% = 12%

EXAMPLE 2
(estimate the stream of expected return)
Calculate the expected return for a bond. Its
current price is $ 895, the next (annual)
coupon is $ 90, and you expected to sell the
bond for $ 910 in one year.
Answer:
Coupon yield = C1/P0 = 90/895 = 10.06%
Capital gain yield = (P1/P0) – 1 = (910/895) – 1 =
1.0168 – 1 = 1,68%
Total expected return= 10.06%+1.68% = 11.74%
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EXAMPLE 3
(estimate the required rate of return)
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Required rate of return =
Rreal rate + Iinflation premium + Prisk premium
Rreal rate + Iinflation premium = Nominal RRisk free
The risk premium, Prisk premium ,is a premium demanded
for internal and external risk factors.
 Internal risk factors are diversifiable and include
business risk, financial risk, liquidity risk, exchange
risk and country risk.
 External risk factors, known as market risk
factors, are macroeconomic in nature and non
diversifiable.
Rate of the government bond is 4.75%.
The inflation prediction for this year is
1%. Risk premium calculated based on the
market rate minus rate of the
government bond is 2.25%. Calculate the
required rate of return.

Answer:
Real rate = 4.75% ; Inflation = 1%
Risk Premium = 2.25%
Required rate of return = 8%
The required return on
Common stock

The required return on a stock (ke) is
usually estimating using the capital
asset pricing model (CAPM)
ke = Rrisk free + Betastock(Rmarket – Rrisk free)
Investment decision process
Once the value of the assets has been
estimated, compare it to the current
market price.
> market price  BUY
If estimated value < market price  DON’T BUY
If estimated value