Analysis of Equity Investments : Valuation

by Stowe, John D.; Robinson, Thomas R.; Pinto, Jerald E.; McLeavey, Dennis W.

• ISBN13: 9780935015768
• ISBN10: 0935015760
• Format: Hardcover
• Copyright: 2002-08-01
• Publisher: Professional Book Distributors

Author Biography

John D. Stowe, Ph.D., CFA is a Professor of Finance and Associate Dean at the University of Missouri-Columbia where he teaches investments and corporate finance Thomas R. Robinson, Ph.D., CPA, CFP, CFA is an Associate Professor of Accounting at the University of Miami where he primarily teaches Financial Statement Analysis Jerald E. Pinto, CFA, principal of TRM Services, consults in investment planning, portfolio analysis, and quantitative analysis Dennis W. McLeavey, CFA is a Vice President in the Curriculum and Examinations Department at AIMR George H. Troughton, Ph.D., CFA is a Professor of Finance at California State University, Chico

Table of Contents

Preface	p. v
Acknowledgments	p. vii
About the Authors	p. ix
Foreword	p. xiv
The Equity Valuation Process	p. 1
Introduction	p. 2
The Scope of Equity Valuation	p. 3
Valuation and Portfolio Management	p. 5
Valuation Concepts and Models	p. 6
The Valuation Process	p. 6
Understanding the Business	p. 6
Forecasting Company Performance	p. 8
Selecting the Appropriate Valuation Model	p. 14
Performing Valuations: The Analyst's Role and Responsibilities	p. 22
Communicating Valuation Results: The Research Report	p. 24
Contents of a Research Report	p. 24
Format of a Research Report	p. 27
Research Reporting Responsibilities	p. 27
Summary	p. 28
Problems	p. 31
Solutions	p. 34
Discounted Dividend Valuation	p. 37
Introduction	p. 39
Present Value Models	p. 40
Valuation Based on the Present Value of Future Cash Flows	p. 40
Streams of Expected Cash Flows	p. 42
Discount Rate Determination	p. 47
The Dividend Discount Model	p. 55
The Expression for a Single Holding Period	p. 56
The Expression for Multiple Holding Periods	p. 57
The Gordon Growth Model	p. 59
The Gordon Growth Model Equation	p. 60
The Implied Dividend Growth Rate	p. 66
Estimating the Expected Rate of Return with the Gordon Growth Model	p. 66
The Present Value of Growth Opportunities	p. 68
Gordon Growth Model and Price-Earnings Ratio	p. 69
Strengths and Weaknesses of the Gordon Growth Model	p. 71
Multistage Dividend Discount Models	p. 71
Two-Stage Dividend Discount Model	p. 72
Valuing a Non-Dividend-Paying Company (First-Stage Dividend = 0)	p. 75
The H-Model	p. 76
Three-Stage Dividend Discount Models	p. 77
Spreadsheet Modeling	p. 80
Finding Rates of Return for Any DDM	p. 81
Strengths and Weaknesses of Multistage DDMs	p. 82
The Financial Determinants of Growth Rates	p. 83
Sustainable Growth Rate	p. 83
Dividend Growth Rate, Retention Rate, and ROE Analysis	p. 85
Financial Models and Dividends	p. 88
Investment Management and DDMs	p. 89
Summary	p. 91
Problems	p. 95
Solutions	p. 103
Free Cash Flow Valuation	p. 113
Introduction to Free Cash Flows	p. 114
FCFF and FCFE Valuation Approaches	p. 115
Defining Free Cash Flow	p. 115
Present Value of Free Cash Flow	p. 116
Single-Stage FCFF and FCFE Growth Models	p. 117
Forecasting Free Cash Flow	p. 119
Computing FCFF from Net Income	p. 119
Computing FCFF from the Statement of Cash Flows	p. 122
Noncash Charges	p. 124
Computing FCFE from FCFF	p. 128
Finding FCFF and FCFE from EBIT or EBITDA	p. 132
Forecasting FCFF and FCFE	p. 134
Other Issues with Free Cash Flow Analysis	p. 138
Free Cash Flow Model Variations	p. 143
An International Application of the Single-Stage Model	p. 143
Sensitivity Analysis of FCFF and FCFE Valuations	p. 144
Two-Stage Free Cash Flow Models	p. 146
Three-Stage Growth Models	p. 152
Non Operating Assets and Firm Value	p. 154
Summary	p. 154
Problems	p. 157
Solutions	p. 166
Market-Based Valuation: Price Multiples	p. 179
Introduction	p. 180
Price Multiples in Valuation	p. 181
Price to Earnings	p. 183
Determining Earnings	p. 184
Valuation Based on Forecasted Fundamentals	p. 192
Valuation Using Comparables	p. 194
Price to Book Value	p. 207
Determining Book Value	p. 209
Valuation Based on Forecasted Fundamentals	p. 214
Valuation Using Comparables	p. 215
Price to Sales	p. 216
Determining Sales	p. 217
Valuation Based on Forecasted Fundamentals	p. 219
Valuation Using Comparables	p. 220
Price to Cash Flow	p. 222
Determining Cash Flow	p. 223
Valuation Based on Forecasted Fundamentals	p. 228
Valuation Using Comparables	p. 229
Enterprise Value to Ebitda	p. 229
Determining EBITDA	p. 230
Valuation Based on Forecasted Fundamentals	p. 233
Valuation Using Comparables	p. 233
Dividend Yield	p. 233
Calculation of Dividend Yield	p. 235
Valuation Based on Forecasted Fundamentals	p. 236
Valuation Using Comparables	p. 236
International Valuation Considerations	p. 237
Momentum Valuation Indicators	p. 238
Valuation Indicators and Investment Management	p. 241
Summary	p. 243
Problems	p. 247
Solutions	p. 254
Residual Income Valuation	p. 261
Introduction	p. 262
Residual Income	p. 262
Commercial Implementations	p. 265
The Residual Income Valuation Model	p. 266
The General Residual Income Model	p. 271
Fundamental Determinants of Residual Income	p. 275
Residual Income Valuation in Relation to Other Approaches	p. 276
Accounting and International Considerations	p. 277
Violations of the Clean Surplus Relationship	p. 278
Balance Sheet Adjustments for Fair Value	p. 280
Intangible Assets	p. 280
Nonrecurring Items	p. 283
Other Aggressive Accounting Practices	p. 283
International Considerations	p. 284
Single-Stage Residual Income Valuation	p. 285
Multistage Residual Income Valuation	p. 286
Summary	p. 291
Problems	p. 294
Solutions	p. 298
References	p. 305
Glossary	p. 309
Index	p. 315
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