Equity

CFA_LV2_Equity_F.hwp

 

 

 

Equity

 

[ Equity Valuation: Applications and Process ]

 

○ Porter's five forces model

		new entrants
supplier power		rivalry			buyer power
		substitutes

 

○ Conglomerate discount

- internal capital inefficiency

- endogenous (internal) factors

- research measurement error

 

[ Return Concepts ]

 

○ Supply-Side estimates

- equity risk premium = [1+i] × [1+rEg] × [1+PEg] - 1 + Y - RF

- i = expected inflation = YTM of 20Y T-bonds - YTM of 20Y TIPS

- rEg = expected real growth in EPS = real GDP growth

- rEg = labor productivity growth rate + labor supply growth rate

- PEg = expected real growth in the P/E ratio

- Y = the expected yield on the index

- RF = the expected risk-free rate

○ Fama-French model

- account for the higher returns associated with small-cap stocks

- required return = RF + βmkt × (Rmkt - RF) + βsmb × (Rsmall - Rbig) + βHML × (RHBM - RLBM)

○ Build-Up model

- required return = RF + equity risk premium + size premium + specific-company premium

 

○ Adjusted beta for public companies

- adjusted beta = ( 2 / 3 × regression beta ) + ( 1 / 3 × 1.0 )

 

○ Beta estimated for thinly traded stocks and nonpublic companies

- βL = βU × ( 1 + debt / equity )

[ The Five Competitive Forces That Shape Strategy ]

 

[ Your Strategy needs a strategy ]

 

○ Predictability vs. Malleability

- predictability defines how accurately and how far into the future a company can forecast industry factors such as demand, corporate performance, and market expectations.

- malleability is the extent to which a company and its competitors can influence the industry. (market maker)

 

○ Appropriate corporate strategy formulation styles vs. business environment

	Less Predictable	More Predictable
Less Malleable	Adaptive (S.P.A)	Classical (oil industry)
More Malleable	Shaping (facebook)	Visionary (UPS)

 

[ Industry and Company Analysis ]

 

○ ROIC vs. ROCE

- ROIC = NOPLAT / invested capital

　- ROCE = pretax operating earnings / invested capital

 

[ Discounted Dividend Valuation ]

 

○ Gordon growth model

-

 

○ H-model

- ⇒ 사각형 넓이 + 삼각형 넓이

gS
gL
			t

- dividend yield = D0 / P를 이용, 역대입

 

○ PVGO (present value of growth opportunities)

-

- PVGO = 성장 있을 때의 PV(유보) - 성장 없을 때의 PV(전액 배당)

 

[ Free Cash Flow Valuation ]

 

○ Equity value

- firm value = FCFF1 / (WACC - g)

- equity value = FCFF1 / (WACC - g) - market value of debt = FCFE1 / (re - g)

○ Cash flow

- NI + NCC - WCInv = CFO

- CFO + Int(1-t) - FCInv = FCFF

- FCFF + net borrowing - Int(1-t) = FCFE

- FCFE - Div ± common stock issues = Net change in cash

 

○ Calculation FCFF

- FCFF = NI + NCC + Int(1-t) - FCInv - WCInv

- FCFF = CFO + Int(1-t) - FCInv

- FCFF = EBIT × (1-t) + Dep - FCInv - WCInv

- FCFF = EBITDA × (1-t) + (Dep × t) - FCInv - WCInv

 

○ Calculation FCFE

- FCFE = FCFF - Int(1-t) + net borrowing

- FCFE = NI + NCC + Int(1-t) - FCInv - WCInv + net borrowing

- FCFE = CFO + Int(1-t) - FCInv + net borrowing

 

[ Market-Based Valuation: Price and Enterprise Value Multiples ]

 

○ Earnings

- underlying earnings : exclude nonrecurring components

- normalized earnings : adjust cyclicality

⇒ 1. average EPS

⇒ 2. average ROE × BVPS (book value per share)

 

○ Justified Multiples

-

-

○ Fed model

- EP ratio on the S&P500 - yield on 10Y US T-bond

 

○ Yardeni model

- CEY = CBY - k × LTEG + e i

⇒ CEYG = current earnings yield of the market

⇒ CBYG = current Moody's A-rated corporate bond yield

⇒ LTEG = five-year consensus earnings growth rate

⇒ k G = constant assigned by the market to earnings growth

- P/E = 1 / CBY - k × LTEG

 

○ EV/EBITDA

- EV = MV of common stock + minority + MV of debt - cash and investments

- TIC = total invested capital

 

○ SUE (standardized unexpected earnings)

- SUE = earnings surprise / standard deviation of earnings surprise

 

○ Mean of PER

- arithmetic mean = (8 + 10) / 2 = 9

- weighted mean = (16/26) × 8 + (10/26) × 10 = 8.76

- harmonic mean = = 8.88

- weighted harmonic mean = = 8.67

- outliers, the arithmetic mean will be the most affected.

 

[ Residual Income Valuation ]

○ EVA & MVA

- Economic value added & Market Value added

- EVA = NOPAT - $WACC = EBIT × (1-t) - $WACC

- MVA = market value - total capital(book value)

 

○ RI

- RIt = Et - (r×Bt-1) = (ROE - r) × Bt-1

-

- ⇒ g로 식 정리 가능

- terminal valuet-1 = (w = persistence factor)

 

○ RI : accounting issues

- clean surplus violations : E1 = E0 + NI - div 위반, AOCI 항목

- FV화 : lease(O → F), LIFO → FIFO, SPE 연결

- nonrecurring items 제거

[ Private Company Valuation ]

 

○ EEM (excess earnings method)

- firm value = working capital + fixed asset + intangible asset

⇒ intangible asset = [( normalized earnings - WC × rWC - FC × rFC ) × (1+g)] / (rIA - g)

 

○ Expanded CAPM

- RF + β × (Rmkt - RF) + small stock premium + company-specific risk premium

 

○ Build-Up model

- required return = RF + equity risk premium + size premium + industry premium

+ specific-company premium

 

○ DLOC & DLOM

- DLOC (discount for lack of control) =

- DLOM (discount for lack of marketability)

- total discount = 1-[(1-DLOC)×(1-DLOM)]