参考学校homework五月week9valuing shares and companies

1、Strategic Corporate FinanceWeek 9 Valuing shares and companiesDescribe the principal determinants of share prices and be able to estimate share value using a variety of approachesDemonstrate awareness of the most important input factors and appreciate that they are difficult to quantifyUse valuation

2、 models to estimate the value of shares when managerial control is achievedLearning esAnalytical abilityGood judgementDeterminants of value occur in the futureE.g. cash flows, dividendsPeople do not always get it rightSkills needed to value sharesIn 1720 a company declared in its prospectus that it

3、was “for carrying on an undertaking of great advantage, but nobody to know what it is”.Investors hurried to buy shares, The founder “set off the same evening for the Continent” and was never heard of again. (Charles Mackay (Victorian writer) Extraordinary Popular Delusions and the Madness of Crowds)

4、Warren Buffett on social networks: “Most of them will be over-priced . Some will be huge winners, which will make up for the rest.” Mr Buffett has long shunned technology companies as having uncertain prospects compared with the insurance and food and drink companies he prefersMySpace: bought by New

5、s Corp for $580m in 2005; peaked in 2008Sold in 2011 for 10th of the figure.Bebo: Bought by AOL in 2008 for $850m and sold in 2011 for less than $10m.Facebook May 2012 Floated at $38/share (Co worth $104bn)Closed at $27 one week laterCurrently $116/share (April 2016)Net asset value (NAV) e flow meth

6、odsDividend based modelsEarnings based modelsCash flow modelsValuation methodsBased on the balance sheetThe business is worth the sum of its net assets Assumes the balance sheet contains objective valuesNAV = Fixed assets + Current assets - Current liabilities - long term liabilitiesNet asset value

7、(NAV)ProblemsAssets are not all valued at market valueMany intangibles are not included at allNAV rarely reflects market valueCould even be negativeDominos Investors are normally looking for an e flowBalance sheets are not designed to reflect current valuationsNet asset valueFirms in financial diffi

8、culty. Assets can be used as security for a loanIf a business is for sale the NAV may be the lowest possible price When DCF is difficult to applyProperty investment companiesInvestment trustsResource based companiesWhere assets values are useful e method: Dividend valuationThe market value of a shar

9、e represents the sum of future dividend flows, to infinity, discounted to present values.Assumes the only cash flows received are in the form of dividendsShare price =d1Dividend next yearkeCost of equityDividend growth modelDividends are often expected to growBusiness work hard to ensure smooth grow

10、th of dividendsGrowth is difficult to measure and forecastIf it is expected to be constant it can be used to estimate the share price Share price =d1Dividend next yearKe - gCost of equity less growth Non constant growthCalculate forecast dividends in first period (d1)Microsoft Estimate the share pri

11、ce at the point where growth changesDiscount the dividends from first period and the share price aboveAdd together the discounted valuesWhat is a normal growth rate?Will be different for all companies but.Overall similar to growth in nominal GDP(real GDP + inflation)Not all companies pay dividendsTh

12、is may be a deliberate policyAssume that one day they will.Microsoft did not pay a dividend for 28 yearsProblems with dividend valuation modelsVery sensitive to assumptionsIf growth = cost of equity, value is infiniteCost of equity is uncertainIf gke the answer is nonsenseForecasting growth rates (g

13、)Focus on the firm:The attractiveness of the industry and the competitive position of the firm within the industryEvaluation of managementUse historical growth of dividendsFinancial statement analysis and ratio analysisForecasting growth rates (g)Focus on the economyMacro-economic changes for GNP/GD

14、P and international economyThe value of a company is determined by long term e flows so short term fluctuations are not relevantPrice earnings ratio (P/E)Compares share price with latest earnings per share (EPS) e based valuation: earningsA plcB plcEarnings per share (p)1010Share price (p)100200P/e

15、ratio1020Why would you buy a share in company B? Because you expect the earnings to growPrice earnings ratio (P/E)Shows expectations of future growth in profitsExample e based valuation: earningsHistoric p/e ratios (S&P 500)Shiller P/E Ratio Calculate p/e ratio for an industry or sectorCompare where

16、 a firm isBut is the industry correctly priced?There may be a bubble in that industryFTSE UK Indices summary Using the P/E ratioSome businesses adopt a pay-out ratioA fixed proportion of their profits are paid out as dividendsTherefore there is a relationship between p/e ratios and ke and gP/e ratio

17、s, g and keCash flow is most importantMore concrete than profitCan adjust profit or use cash flow statement e based valuation: cash flowValuations through cash flowCash flow-based share valuationEstimated average annual cash flow Year 201620172018201920202021 + m m m m m m Forecast profits 11.015.01

18、5.016.017.0 Add depreciation, etc. 1.02.55.54.54.0 Working capital changes 1.0-0.50.01.01.0 Tax (paid in year) -3.3-5.0-5.0-5.4-5.8 Interest on debt capital -0.5-0.5-0.5-0.6-0.7 Fixed capital investment -1.0-16.00.0-1.2-1.8 Cash flow 8.2-4.515.014.313.714.0Valuations through cash flowCash flow-based share valuationEstimated average annual cash flow Year 201620172018201920202021 + m m m m m m Cash flow/share in pence8.2-4.515.014.313.714.0Assum