【正文】 e. e: Calculate the value of a mon stock for a pany experiencing temporary supernormal growth. The infinite period DDM doesn39。 PV= $.99. Step 3: find the PV of the future price: FV = $25, n = 1。十三 Asset Valuation: Equity Investments : An Introduction to Security Valuation a: Explain the topdown approach and its underlying logic to the security valuation process. Step 1 General economic influences: fiscal policy: tax cuts encourage spending and tax increases discourage spending. moary policy: a restrictive policy reduces the availability of funds and causes interest rates to rise putting upward pressures on costs. In addition to fiscal and moary actions you must also consider the economic consequences of political changes around the globe. From a global portfolio perspective you have to consider the economic events in other countries. Step 2 Industry influences: The next step in the valuation process is to identify those industries that will prosper or suffer during the time frame of your economic forecast. You should consider the cyclical nature of the industry under study. Some industries are cyclical, some are contra cyclical and some are noncyclical. Finally, your analysis should also account for foreign economic shifts. In general, an industry’s prospects within the global business environment determine how well or poorly individual firms in the industry do. Step 3 Company Analysis: After determining the industry’s outlook you should pare the individual firm’s performance within the entire industry using financial ratios and cash flow values. Your goal is to identify the best pany in a promising industry. This involves not only examining the firm’s past performance, but also its future prospects. b: Calculate the value of a preferred stock, assuming a perpetual dividend. Valuation of preferred stock is easy since the dividend is fixed and the preferred’s life is infinite (it’s a perpetuity) appears in the upper right hand corner. Again, the only problem is determining kP. Because of default risk factors, the preferred’s discount rate (kP) should be above the firm’s bond rate (kB). But since dividends paid by one corporation to another corporation are 80% tax exempt, preferred yields are below the firm’s highestgrade bond yields. preferred value= D + D +...+ D = D (1 +kp)1 (1 + kp)2 (1 + kp)176。 i = 11。t work with growth panies. Growth panies are firms that currently have the ability to earn rates of return on investments that are currently above their required rates of return. The infinite period DDM assumes the dividend stream grows at a constant rate forever while growth panies have high growth rates in the early years that level out at some future time. The high early or supernormal growth rates will also generally exceed the required rate of return. Since the assumptions (constant g and kg) don39。 EBDIT is 20% of sales。s assets should be pretty close to the market value of its assets. However, in practice the two can differ dramatically. High P/BV ratios can result from large amounts of fixed assets being carried at historical costs, while low P/BV ratios can occur when assets (like bad debts) are worth less than book value. Variance from one could also indicate mispricing. Price/cash flow ratio (P/CF). The price/cash flow ratio is defined as the market value of the pany divided by its cash flow. The P/CF ratio should be used in conjunction with the P/E ratio because earnings (the denominator of the P/E ratio) are subject to accounting gimmicks and manipulation. Cash flows are typically more stable. As cash flow numbers have bee more available, interest in this ratio has increased. Price/sales ratio (P/S). The price/sales ratio is defined as the market value of the pany divided by its sales. Sales are typically seen as the accounting variable least likely to be manipulated. Sales growth directly influences cash flows and earnings. c: Describe economic value added (EVA) market value added (MVA), and the franchise factor. Economic value added (EVA?). Note: EVA is a registered trademark of Stern, Stewart, amp。s quick and easy. ? It does not involve messing with data and adjusting for accounting problems. ? It incorporates psychological as well as economic reasons behind price changes. ? It tells when to buy。 expected dividend payout ratio, required rate of return, and expected growth rate of dividends. The basic DDM model looks at the stream of expected returns, their timing and the required rate of return. If you assume g and k are constant and that the stock pays dividends the basic model simplifies into the infinite period (or constant growth) model to below. Stock value = stock price = D0 (1 + g) = D1 ke g ke g Note: if the market is efficient the stock’s price will equal the stock’s value. The basic infinite period DDM can be converted to an expected P / E ratio by dividing both sides of the equation by the expected earnings, E1 in the model below: Note: P0 is the price of the stock right now. Note: P0 / E0 is called the historical earnings multiplier. Note: the P/E ratio varies between stocks and industries. P0 = D1 / E1 E1 ke g c: Estimate the value of, and explain the level of and changes in the earnings multiplier of a stock market series. A twopart valuation procedure of a stock market series or index: 1. Estimate the future earnings per share for the stock market series. (EFuture) 2. Estimate a future earnings multiplier for the stock market series. (P/EFuture) Note: empirical evidence shows that the earnings multiplier is a more volatile variable than earnings. After you estimate the future earnings per share (E) and future earnings multiplier (P/E) you multiply them together to get an estimate of what the stock market series will be worth at the end of the period. End of period i