CHAPTER 18: Equity Valuation Model
18.1 Valuation by Comparables (Định giá bằng phương pháp so sánh)
-These valuation ratios (Price/earnings, Price/Book, Price/Sale,PEG=PE/the
growth rate,...) are commonly used to assess the valuation of one firm compared to
others in the same industry.
+Ratio are both below the industry average ratio➡indicate that its stock is
underpriced.
●Limitations of Book Value
-Whereas book values are based on original cost, market values measure current
values of assets and liabilities.
-The market value of the shareholders’ equity investment equals the difference
between the current values of all assets and liabilities.
-It is possible, but uncommon, for market value to be less than book value.
-A better measure of a floor (giá sàn) for the stock price is the firm’s liquidation
value (giá trị thanh lý) per share.
+This represents the amount of money that could be realized by breaking up the
firm, selling its assets, repaying its debt, and distributing the remainder to the
shareholders.
+If the market price of equity drops below liquidation value, the firm becomes
attractive as a takeover target (thâu tóm).
+A corporate raider (người chèo lái) would find it profitable to buy enough shares
to gain control and then actually to liquidate (thanh lý).
-Another measure of firm value is the replacement cost of assets less liabilities.
+Some analysts believe the market value of the firm cannot remain too far above
its replacement cost because if it did, competitors would enter the market.
18.2 Intrinsic Value versus Market Price (Giá trị nội tại so với giá trị thị
trường)
-The most popular model for assessing the value of a firm as a going concern starts
from the observation that an investor in stock expects a return consisting of cash
dividends and capital gains or losses.
-The expected holding-period return (TSSL kỳ vọng trong kỳ nắm giữ)
↪The expected dividend yield (tổng tỷ suất cổ tức kỳ vọng), E(D1)/P0
↪the expected rate of price appreciation (tỷ lệ chênh lệch giá kỳ vọng), the capital
gains yield, [E(P1)- P0]/P0.
-The CAPM states that when stock market prices are at equilibrium levels, the rate
of return that investors can expect to earn on a security is
-We will denote this required rate of return as k.
+If a stock is priced “correctly,” it will offer investors a “fair” return, that is, its
expected return will equal its required return.
+Of course, the goal of a security analyst is to find stocks that are mispriced. For
example, an underpriced stock will provide an expected return greater than the
required return.
-Another way to see this is to compare the intrinsic value of a share of stock to its
market price.
+The intrinsic value, denoted V0, is defined as the present value of all cash
payments to the investor in the stock, including dividends as well as the proceeds
from the ultimate sale of the stock, discounted at the appropriate risk-adjusted
interest rate, k.
+If the intrinsic value, or the investor’s own estimate of what the stock is really
worth, exceeds the market price, the stock is considered undervalued and a good
investment.
+If the intrinsic value turns out to be lower than the current market price, investors
should buy less of it than under the passive strategy. It might even pay to go short
on ABC stock.
+In market equilibrium, the current market price will reflect the intrinsic value
estimates of all market participants.
-A common term for the market consensus value of the required rate of return, k,
is the market capitalization rate.
18.3 Dividend Discount Models
-The intrinsic value of the share is
-The dividend discount model (DDM) of stock prices.
●The Constant-Growth DDM (Mô hình chiết khấu cổ tức với tỷ lệ tăng
trưởng không đổi)
-Intrinsic value is:
-The constant-growth DDM is valid only when g is less than k.
-If dividends were expected to grow forever at a rate faster than k, the value of the
stock would be infinite.
-The constant-growth rate DDM implies that a stock’s value will be greater:
+The larger its expected dividend per share.
+The lower the market capitalization rate, k.
+The higher the expected growth rate of dividends.
-The DDM implies that in the case of constant growth of dividends, the rate of
price appreciation in any year will equal that constant-growth rate, g.
-For a stock whose market price equals its intrinsic value (V0 =P0), the expected
holding-period return will be:
●Convergence of Price to Intrinsic Value (sự hội tụ về giá của giá trị nội tại)
-The stock is undervalued➡In this case the expected rate of price appreciation
depends on an additional assumption about whether the discrepancy between the
intrinsic value and the market price will disappear, and if so, when.
-One fairly common assumption is that the discrepancy (sự sai lệch) will never
disappear and that the market price will trend upward at rate g forever. This
implies that the discrepancy between intrinsic value and market price also will
grow at the same rate.
●Stock Prices and Investment Opportunities
-If A companies could in principle pay out all of their earnings as dividends,
maintaining a perpetual dividend flow➡Neither firm would grow in value,
because with all earnings paid out as dividends, and no earnings reinvested in the
firm, A companies’ capital stock and earnings capacity would remain unchanged
over time; earnings and dividends would not grow.
-Suppose, therefore, that A chooses a lower dividend payout ratio (d), maintaining
a plowback ratio (b)➡Stock price will increase. Although dividends initially fall
under the earnings reinvestment policy, subsequent growth in the assets of the firm
because of reinvested profits will generate growth in future dividends, which will
be reflected in today’s share price.
+A low-reinvestment-rate plan allows the firm to pay higher initial dividends, but
results in a lower dividend growth rate.
+A high-reinvestment-rate plan will provide higher dividends.
-The growth rate of the dividends:
-If the stock price equals its intrinsic value, it should sell at
-The value of the firm rises by the NPV of these investment opportunities. This net
present value is also called the present value of growth opportunities, or PVGO.
-Growth enhances company value only if it is achieved by investment in projects
with attractive profit opportunities (with ROE>k).
-With ROE =k, there is no advantage to plowing funds back into the firm; this
shows up as PVGO of zero.
●Life Cycles and Multistage Growth Models (chu kỳ sống và mô hình tăng
trưởng nhiều giai đoạn)
Giả định gồm 2 giai đoạn: 1 giai đoạn tăng trưởng bất kì; 1 giai đoạn giữ nguyên
g=0
●Multistage Growth Models (Mô hình tăng trưởng nhiều giai đoạn)
-They may assume an initial period of high dividend growth (or instead make
yearby-year forecasts of dividends for the short term), a final period of sustainable
growth, and a transition period between, during which dividend growth rates taper
off from the initial rapid rate to the ultimate sustainable rate.
18.4 Price–Earnings Ratio
●The Price–Earnings Ratio and Growth Opportunities
-P/E ratio: the ratio of price per share to earnings per share➡a useful indicator of
expectations of growth opportunities.
+When PVGO=0, Equation shows that P0 =E1/k. The stock is valued like a
nongrowing perpetuity of E1, and the P/E ratio is just 1/k.
+However, as PVGO becomes an increasingly dominant contributor to price, the
P/E ratio can rise dramatically.
-The ratio of PVGO to E/k:
+It is the ratio of the component of firm value due to growth opportunities to the
component of value due to assets already in place.
+When future growth opportunities dominate the estimate of total value, the firm
will command a high price relative to current earnings. Thus a high P/E multiple
indicates that a firm enjoys ample growth opportunities.
-The P/E ratio reflects the market’s optimism concerning a firm’s growth
prospects.
+It is easy to verify that the P/E ratio increases with ROE.
+The P/E ratio increases for higher plowback, b;as long as ROE exceeds k.
-Although growth always increases with the plowback rate, the P/E ratio does not
+When the expected ROE <the required return k, investors prefer that the firm pay
out earnings as dividends rather than reinvest earnings in the firm at an inadequate
rate of return➡ The value of the firm falls as plowback increases.
+When ROE >k, the firm offers attractive investment opportunities, so the value of
the firm is enhanced as those opportunities are more fully exploited by increasing
the plowback rate.
-The P/E ratio of any company that’s fairly priced will equal its growth rate.
But if the P/E ratio is less than the growth rate, you may have found yourself a
bargain (món hời).
●P/E Ratios and Stock Risk
-Riskier stocks will have lower P/E multiples (holding all else equal).
+Riskier firms will have higher required rates of return- k→the P/E multiple will
be lower.
●Pitfalls in P/E Analysis (Cạm bẫy trong phân tích P/E)
●Combining P/E Analysis and the DDM
●Other Comparative Valuation Ratios
⛤The price–earnings ratio
⛤Price-to-Book Ratio
-This is the ratio of price per share divided by book value per share.
⛤Price-to-Cash-Flow Ratio
-Earnings as reported on the income statement are commonly viewed
as subject to some imprecision (thiếu chính xác) and even manipulation (bị thao
túng).
-In contrast, cash flow—which tracks cash actually flowing into or out of the
firm—is less affected by accounting decisions.
⇉Some analysts prefer to use the ratio of price to cash flow per share rather than
price to earnings per share.
⛤Price-to-Sales Ratio
18.5 Free Cash Flow Valuation Approaches (PP định giá dòng tiền tự do)
-Free cash flow: cash flow available to the firm or its equityholders net of capital
expenditures.
-This approach is particularly useful for firms that pay no dividends
⛤The free cash flow for the firm (FCFF)
-Discount FCFF at the weighted average cost of capital (CP sử dụng vốn trung
bình có trọng số) to obtain the value of the firm, and subtract the then-existing
value of debt to find the value of equity.
-FCFF is the after-tax cash flow generated by the firm’s operations, net of
investments in capital, and net working capital (vốn luân chuyển ròng). It includes
cash flows available to both debt- and equityholders. It equals:
⛤The free cash flow to equityholders (FCFE)
-Discounting those directly at the cost of equity to obtain the market value of
equity.
-Equity value:
+We subtract the existing market value of debt from the derived value
of the firm.
+Alternatively, we can discount FCFE at the cost of equity, kE.
●Comparing the Valuation Models
●The Problem with DCF Models