章节权益类投资

TopicWeightingsinCFALevelII

2-248

SessionNO.

Content

Weightings

StudySession1-2

Ethics&ProfessionalStandards

10-15

StudySession3

QuantitativeMethods

5-10

StudySession4

EconomicAnalysis

5-10

StudySession5-7

FinancialStatementAnalysis

15-20

StudySession8-9

CorporateFinance

5-15

StudySession10-12

EquityAnalysis

15-25

StudySession13

AlternativeInvestments

5-10

StudySession14-15

FixedIncomeAnalysis

10-20

StudySession16-17

DerivativeInvestments

5-15

StudySession18

PortfolioManagementandWealthPlanning

5-10

Total:

100

SummaryofReadingsandFramework

SS10

R29EquityValuation:ApplicationsandProcesses

R30ReturnConcepts

SS11

R31TheFiveCompetitiveForcesthatShapeStrategy

R32YourStrategyNeedsaStrategy

R33IndustryandCompanyAnalysis

R34DiscountedDividendValuation

SS12

R35FreeCashFlowValuation

R36Market-BasedValuation:PriceandEnterpriseValueMultiples

R37ResidualIncomeValuation

R38PrivateCompanyValuation

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ValuationandIntrinsicValue

Valuationistheprocessofestimatingthevalueofanassetby:

Usingamodelbasedonvariablestheanalysisbelievesinfluencethefundamentalvalueoftheasset

Comparingittotheobservablemarketvalueof―similarǁassets

Generalstepsintheequityvaluationprocess:

Understandthebusiness.

Forecastcompanyperformance.

Selecttheappropriatevaluationmodel.

Converttheforecastsintoavaluation.

Applythevaluationconclusions.

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DifferentKindsofValues&Valuation

Intrinsicvalue(IV):thevaluationofanassetorsecuritybysomeonewhohascompleteunderstandingofthecharacteristicsoftheassetorissuing

firm.

IVanalyst

-price=(IVactual-price)+(IVanalyst

-IVactual)

Fairmarketvalue:thepriceatwhichahypotheticalwilling,informed,andablesellerwouldtradeanassettoawilling,informed,andablebuyer.

Investmentvalue:valueofastocktoaparticularbuyer.

Liquidationvalue:valuewhencompanywillnotcontinuetooperate.

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ApplicationsofEquityValuation

Objectives

Stockselection:toguidethepurchase,holding,orsaleofstocks.

Readingthemarket:currentmarketpricesimplicitlycontaininvestor‘sexpectationsaboutthefuturevalueofthevariablesthatinfluencethestock‘sprice.

Projectingthevalueofcorporateactions:usevaluationtechniquestodeterminethevalueofproposedcorporatemergers,acquisitions,divestitures,MBO,andrecapitalizationefforts.

Fairnessopinions:tosupportprofessionalopinions.

Planningandconsulting:toevaluatetheeffectsofproposedcorporatestrategiesonthefirm‘sstockprice,pursuingonlythosethathavethegreatestvaluetoshareholders.

Communicationwithanalystsandinvestors:valuationapproachprovidesacommonbasisuponwhichtodiscussandevaluatethecompany.

Valuationofprivatebusiness:valueofthefirmorholdingsinfirmsthatarenotpubliclytraded.

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ApplicationsofEquityValuation

Portfoliomanagement

planning,executionandfeedback→3stepsintheportfoliomanagementprocess(valuationismostcloselyassociatedwiththeplanningandexecutionsteps).

Planning

identificationandspecificationtheinvestmentobjectivesandconstraints→writingdetailontheinvestmentstrategyofsecuritiesselection

ValuationonindividualsecurityisnotapplytoIndexingstrategybutactivemanagement.

Execution

Portfolioselection

Portfolioimplementation

Feedback

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ValuationProcess

Valuationprocess

Understandingthebusiness

Elementsofindustrystructure(Porter‘sfiveforces)

Threatofnewentrantsintheindustry;

Threatofsubstitutes;

Bargainingpowerofbuyers;

Bargainingpowerofsuppliers;

Rivalryamongexistingcompetitors.

Threegenericstrategies:

Costleadership;

Productdifferentiation;

Focus.

Forecastingcompanyperformance

Top-downforecastingapproach

Bottom-upforecastingapproach

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ValuationProcess

Detailedexaminationofthefootnotesaccompanyingthefinancialreports:

Acceleratingorprematurerecognitionofincome.

Reclassifyinggainsandnon-operatingincome.

Expenserecognitionandlosses.

Amortization,depreciation,anddiscountrates.

Off-balance-sheetissues.

Selectingtheappropriatevaluationmodel

Absolutionvaluationmodel;

DDM,FCFM,residualincomeapproach,asset-basedmodel

Relativevaluationmodel.

Multiples,suchasP/E,P/B,P/CF,etc.

Convertingforecaststoavaluation

Makingtheinvestmentdecision

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QuantitativeandQualitativefactorsinvaluation

Quantitativefactors

keysourcefromcompany‘saccountinginformationandfinancialdisclosures

Including:balancesheet,incomestatement,cashflowstatement,aswellasthefootnotes

Qualitativefactors

Purpose:tomeasureindustryperformance,suchaslegalandregulatoryenvironment

Including:

qualityofthefirm‘smanagementteam;

thetransparencyofitsperformance;

theanalyst‘sconfidenceinthefirm‘s;

industry‘saccountingpractices

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Qualityofinputs

Qualityofinputs

Analystscanforecastfirm‘sfutureeconomicvaluebasedfacts

Requirement

oncurrent

Thefinancialfactorsmustbedisclosedinsufficientdetailandaccuracy

Theinvestigationofissuesrelatingtoaccuracyisoftenbroadly

referredtoasqualityofearningsanalysis,namelythescrutinyofallfinancialstatements

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Footnotesofaccountingstatementsandotherdisclosures

Indicatorsofselectedqualityofearnings

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Category

Observation

Example

Revenuesandgains

Recognizingrevenueearly

Acceleratingorprematurerecognitionofincome

Reclassifyinggainsandnon-operatingincome

ExpensesandLosses

DelayofRecognitionofExpenses

Expenserecognitionandlosses

Amortization,depreciation,anddiscountrates

BalanceSheetIssues

Off-balance-sheetissues

SPEs

IntrinsicValueandAlpha

Intrinsicvalueisthevalueofanassetgiveahypotheticallycompleteunderstandingoftheassets‘investmentcharacteristics.Valuationisapartoftheactivemanager‘sattempttoproductionpositiveexcessreturn

Alpha,anexcessrisk-adjustedreturn,alsocalledanabnormalreturn

Formula:

exantealpha=expectedholdingperiodreturn–requiredreturn

expostalpha=actualholdingperiodreturn–contemporaneousrequiredreturn

thedifferencebetweenintrinsicvalue(V)andmarketvalue(P)→perceivemispricing→becomespartofthemanager‘sforecastofexpectedreturn→influencethetotalreturnontheasset→namely

influencealpha

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GoingConcernAssumption

Acompanyhasonevalueifitisimmediatelydissolved,andanothervalueifitcontinuesinoperation.

Going-concernassumption

Itisbasedontheassumptionthatthecompanywillmaintainitsbusinessactivitiesintotheforeseeablefuture.

going-concernvalueofthecompanyisthevalueunderagoing-concernassumption

Non-going-concernassumption

Non-going-concernvalueisbasedontheassumptionthatthecompanywillfinishoperatingandallassetswillbesoldout.

Alsocalledliquidationvalueduetoliquidationshouldbeconcernedinthisassumption

going-concernvalue＞liquidationvalue

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Typesofvaluationmodels

Thetwoboardtypesofgoing-concernmodelsofvaluationare:

Absolutevaluationmodels

Relativevaluationmodels

Absolutevaluationmodels

themodelthatspecifiesanasset‘sintrinsicvaluewhichisinordertobecomparedwiththeasset‘smarketprice(doesnotneedconsideraboutthevalueofotherfirms).

Twotypes:

Presentvaluemodelordiscountedcashflowmodel

DDM

FCFmodel

Residualincomemodel

Asset-basedmodel:sometimeisusedtovaluethecompanythatownorcontrolnaturalresources,suchasoilfields,coaldepositsandother

mineralclaims

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Typesofvaluationmodels

Relativevaluationmodels(methodofcomparable)

themodelthatspecifiesanasset‘svaluerelativetothatofanotherasset

Itistypicallyimplementedusingpricemultiples

Forexample:P/Efirm<P/Emarket→stockisrelativelyundervalued

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Sum-of-the-partsvaluation&conglomeratediscount

Sum-of-the-partsvaluation

Sum-of-the-partsvaluation(break-upvalueorprivatemarketvalue):ananalystcanvalueindividualpartsofthefirmandaddthemuptodeterminethevalueforthecompanyasawhole.

Conglomeratediscount

Investorsapplyamarkdowntothevalueofacompanythatoperatesinmultipleunrelatedindustries,comparedtothevalueacompanythathasasingleindustryfocus.Itistheamountbywhichmarketvalueunder-representssum-of-the-partsvalue.

Threeexplanationsforconglomeratediscountsare:

Internalcapitalinefficiency:allocationofcapitalnotbasedonsounddecisions.

Endogenous(internal)factors:pursuedunrelatedbusinessacquisitionstohidepooroperatingperformance.

Researchmeasurementerrors:conglomeratediscountsarearesultofincorrectmeasurement.

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BroadCriteriaforChoosingAppropriateApproach

Whenselectinganapproachforvaluingagivencompany,ananalystshouldconsiderwhetherthemodel:

Fitsthecharacteristicsofthecompany.

Isappropriatebasedonthequalityandavailabilityofinputdata.

Issuitablegiventhepurposeoftheanalysis.

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SummaryofReadingsandFramework

SS10

R29EquityValuation:ApplicationsandProcesses

R30ReturnConcepts

SS11

R31TheFiveCompetitiveForcesthatShapeStrategy

R32YourStrategyNeedsaStrategy

R33IndustryandCompanyAnalysis

R34DiscountedDividendValuation

SS12

R35FreeCashFlowValuation

R36Market-BasedValuation:PriceandEnterpriseValueMultiples

R37ResidualIncomeValuation

R38PrivateCompanyValuation

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1.Returnconcepts

Holdingperiodreturn

Holdingperiodreturnisthereturnearnedfrominvestinganassetoveraspecifiedtimeperiod.

Theformula:

r=P1-P0+D1=D1+P1

-1=dividendyield+priceappreciationreturn

P0

AnnualizedHPR.

P0

Forexample:ifthereturnforonemonthis1%thentheannualizedHPRis(1+0.01)12-1=12.68%

Realized&expectedreturn

Realizedreturn:isthesamewithHPR.Itisbackward-lookingcontext.

Expectedreturn:Inforward-looking,aninvestorcanformanexpectationconcerningthedividendandsellingprice.

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1.Returnconcepts

Requiredreturn(opportunitycost)

theminimumlevelofexpectedreturnthataninvestorrequiresinordertoinvestintheassetoveraspecifictimeperiod,giventhe

assets‘riskiness.

Itrepresents:

Athresholdvalueforbeingfairlycompensatedfortheriskoftheasset.

Ifinvestor‘sexpectedreturn>requiredreturn,theassetis

undervalued;andviceversa.

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1.Returnconcepts

Expectedreturn

Whenaassetismispriced,priceofassetsconvergestoitsintrinsicvalueinaperiodtime.

Theinvestor‘sexpectedrateofreturncomprises:

Requiredreturn;and

Areturnfromconvergenceofpricetovalue.

+V0-P0

P0

E(R)»rT

Where,

V0,thereintrinsicvalueofthestock;

P0,thecurrentpriceofthestock

rT,requiredreturnduringtheconvergencetimeperiod

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1.Returnconcepts

Discountrate

ItisarateusedinfindingthePVoffuturecashflows;

Usedtodeterminetheintrinsicvaluedependsonthecharacteristicsoftheinvestmentratherthanthatofpurchaser;

Internalrateofreturn(IRR)

IRRisamarket-determinedrate.Itistheratethatequatesthevalueofthediscountedcashflowsthecurrentpriceofthesecurity.

Ifthemarketsareefficient,thentheIRRrepresentstherequired

return.

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2.Equityriskpremium

Theequityriskpremiumistheincrementalreturn(premium)thatinvestorsrequireforholdingequitiesratherthanarisk-freeasset.

Equityriskpremium=Requiredreturnonequityindex–risk-freerate

CAPM

Requiredreturnonshare =Currentexpectedrisk-freereturn+βi

i

(Equityriskpremium)

Build-upMethod

Requiredreturnonsharei=Currentexpectedrisk-freereturn

+Equityriskpremium

±Otherriskpremium/discounts

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2.Equityriskpremium

Historicalestimate

Equityriskpremium:consistsofthedifferencebetweenthehistoricalmeanreturnforabroad-basedequity-marketindexandarisk–freerateoveragiventimeperiod.

Issuesinhistoricalestimate

Selectanappropriateindex.Anindexisfrequentlyadjusted.Indrivingthereturn,itshouldbestationary.

Timeperiod.Thelongertheperiodused,themoreprecisetheestimate.

Arithmeticmeanorgeometricmean(lower)inestimatingthereturn;

Longtermbondorshorttermbillisaproxyfortherisk-freeassets.

Issues

Survivorshipbias.Thatresultstheover-estimatereturnonindexandtheERP.Downwardadjustmentisusedtooffsetthebias.

Riskpremiumwillbelowerwhengeometricmeanisusedorusedoflonger-termbondsratherthanshorter-termbondstoestimatetherisk-freerate.

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2.Equityriskpremium

Forward-looking(Exante)estimate–conceptualframework

ERPisbasedonexpectationsforeconomicandfinancialvariablesfromthepresentgoingforward.ItislogicaltoestimateERPdirectlybasedoncurrentinformationandexpectation.

Itisnotsubjecttotheissuessuchasnon-stationaryordataseriesinhistoricalestimate.Butitissubjecttopotentialerrorsrelatedtomodelsandbehavioralbias.

3approaches

Gordongrowthmodel(GGM)estimate;

Macroeconomicsmodelestimate;and

Surveyestimate.

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2.Equityriskpremium

GGM

GGMequityriskpremiumestimate=Dividendyieldontheindexbasedonyear-aheadaggregateforecasteddividendsandaggregatemarketvalue+Consensuslong-termearningsgrowthrate–Currentlong-termgovernmentbondyield

Asimplewaytounderstandtheequation:

ERP=r-RFR=D1+g-RFR

P0

Theaboveequationassumesgrowthrateisconstant.

AnanalystmaymakeadjustmenttoreflectP/Eboomorbust.

Anothermethodtosolvetheseproblems:

EquityIndexPrice=PVrapid(r)+PVtransition(r)+PVmature(r)

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2.Equityriskpremium

Supply-SideEstimates(MacroeconomicModel)

Expectedrisk-freerate

ExpectedchangesintheP/Eratio

Expectedinflation

ExpectedrealgrowthinGDP

Expectedyieldontheindex

iˆ=(YTMof20-yearT-bonds)-(YTMof20-yearTIPS)

TIPS:TreasuryInflationProtectedSecurities

Expectedinflation:

ExpectedrealgrowthinGDP:

rEˆG=realGDPgrowth

rEˆG=laborproductivitygrowthrate+laborsupplygrowthrate

Forward-looking(Exante)estimate–survey

Usetheconsensusoftheopinionsfromasampleofpeople.

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^ ^ ^ ^ ^

ERP=[1+i]·[1+rEg]·[1+PEg]-1+Y-RF

2.Equityriskpremium

Comparison

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Estimates

Strength

Weakness

HistoricalEstimates

afamiliarandpopularchoice(ifreliablelong-termrecordsareavailable)

unbiasedestimate(ifnosystematicerrorshasbeenmade)

objectivequality(groundedindata)

precisionissues(duetothereduced/dividedlengthofdata)

difficult-to-maintainstationaryassumption(iftheseriesstartingpointextendedtothedistantpast)

empiricallycountercyclicalexpectedequityriskpremium

survivorshipbiasandpositive/negativesurprises

Forward-lookingEstimates

available(directbasedoncurrentinfo.andexpectationsconcerningsuchvariables)

notsubjecttotheissueofnon-stationarityordatabiases

oftensubjecttootherpotentialerrorsrelatedtofinancial/economicmodelsandbehavioralbiasesinforecasting.

subjective

2.Equityriskpremium

Comparison

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Estimates

Strength

Weakness

GGM

Popularmethod;

Reasonablewhenappliedtodevelopedeconomiesandmarkets;

Typicallysamplesources.

Changethroughtimeandneedtobeupdated;

Assumptionofastablegrowthrate.

Supply-SideEstimates

Provenmodels;

Currentinformation;

Onlyappropriatefordevelopedcountries;

SurveyEstimates

Easytoobtain

Widedisparityfromdifferentgroups

3.Requiredreturnonequity

Inestimatingtherequiredreturnonequity,theanalystcanchoosefollowingmodels:

CAPM;

Multifactormodels;

Fama-FrenchModel(FFM);

Pastor-Stambaughmodel(PSM);

MacroeconomicMultifactormodels;

Build-upmethod

BondYieldPlusRiskPremiumMethod

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3.Requiredreturnonequity

CAPMmodel

Requiredreturnonsharei=Currentexpectedrisk-freereturn

+βi(Equityriskpremium)

It‘sanequilibriummodelbasedonkeyassumptions:

Investorsareriskaversion;

Investorsmakeinvestmentdecisionbaseonthemeanreturnandvarianceofreturnoftheirportfolio.

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3.Requiredreturnonequity

CAPMmodel—BetaEstimatesforPublicCompanies

EstimatingBetaforpubliccompany

Thechoiceofindex:theS&P500andtheNYSEcomposite.

Thelengthandfrequencyofsampledata:

mostcommonchoiceis5yearsofmonthlydata;

Twoyearsofweeklydataforfastgrowmarket.

AdjustedBetaforPublicCompanies

Adjustedbeta=(2/3)(Unadjustedbeta)+(1/3)(1.0)

Betadriftreferstotheobservedtendencyofanestimatedbetatoreverttoavalueof1.0overtime.

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3.Requiredreturnonequity

EstimatingBetafortinytradedstockornonpubliccompanies:

Step1:Selectingbenchmarkcompany(comparable)

Usethepubliccompanies‘informationinthesameindustry;

Step2:Estimatethebenchmark’sbeta(similarwithprevioussection);

Step3:Unleveredbenchmark‘sbeta:

1

b

b

»

1+(D/E)

U

E

Step4:leveruptheunleveredbetafortinytradedstockornonpubliccompanies:

»1+(/

'

b

'

b

'

DE

E

U

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3.Requiredreturnonequity

Multifactormodel

ThebetainCAPMdoesnotdescribetheriskcompletely.Multifactormodelsaredeveloptoaccountfortherisksmorecompletely.

Factorsensitivityisalsocalledthefactorbeta,itistheasset‘ssensitivitytoa

particularfactor,andzerosensitivitytoallotherfactors.

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RequiredReturn=RF+RP1+RP2++RPn

RPi =factorsensitivityi·factorriskpremiumi

3.Requiredreturnonequity

Multifactormodel

Fama-FrenchModelVs.Pastor-Stambaughmodel(PSM)

FFM

PSM

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RequiredReturn=RF+bmkt,j·(Rmkt-RF)

Small/largecap +bSMB,j·(Rsmall-Rbig)

High/lowbook-to- +b ·(R -R )

market HML,j HBM LBM

+bliq(RLL-RHL)

i

bSMB,j>0,small-cap

bHML,j>0,value-oriented

Example:Fama-FrenchModel

TheestimatedfactorsensitivitiesofTerraNovaEnergytoFama—Frenchfactorsandthe

riskpremiumassociatedwiththosefactorsaregiveninthetablebelow:

BasedontheFama-frenchmodel,calculatetherequiredreturnforTerraNovaEnergyusingthesesestimates.AssumethattheTreasurebillrateis4.7percent.

DescribetheexpectedstylecharacteristicsofTerraNovabasedonitsfactorsensitivities.

Answer:

A. r=4.7%+(1.20x4.5%)+(-0.50x2.7%)+(0.15x4.3%)=4.7%+5.4%-1.35%-0.645%=

9.4%

B. TerraNovaEnergyappearstobealarge-cap,growth-oriented,highmarketriskstockasindicatedbyitsnegativesizebeta,negativevaluebeta,andmarketbetaabove1.0.

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FactorSensitivity

RiskPremium(%)

MarketFactor

1.20

4.5

SizeFactor

-0.50

2.7

ValueFactor

-0.15

-4.3

3.Requiredreturnonequity

MacroeconomicMulti-factormodels

MacroeconomicMultifactormodelsusefactorsassociatedwitheconomicvariables.

Burmerster,Roll,andRossmodelincorporatesthefollowingfivefactors:

Confidencerisk:unexpectedchangeinthedifferencebetweenreturnofriskycorporatebondsandgovernmentbonds.

Timehorizonrisk:unexpectedchangeinthedifferencebetweenthereturnoflong-termgovernmentbondsandtreasurybills.

Inflationrisk:unexpectedchangeintheinflationrate.

Business-cyclerisk:unexpectedchangeinthelevelofrealbusinessactivity.

Markettimingrisk:theequitymarketreturnthatisnotexplainedbytheotherfourfactors.

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3.Requiredreturnonequity

Build-upmethod

Thebasicideafortherequiredreturnonequityis

ri=Risk-freerate+Equityriskpremium±Oneormorepremium(discounts)

Forprivatebusinessvaluation

ri=Risk-freerate+Equityriskpremium+Sizepremium

+Specific-companypremium

BondYieldPlusRiskPremiumMethod

BYPRPcostofequity=YTMonthecompany‘slong-termdebt+Riskpremium

Tips:Payingcarefulattentiontowhetherthereisapositiveornegativesignattachedtothecomponent----andworkthroughitlogically.

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3.Requiredreturnonequity

Comparisonofthemethods

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Methods

Strength

Weakness

CAPM

Verysimpleinthatitusesonly

onefactor

Choosingtheappropriatefactor.

lowexplanatorypowerinsomecases

Multifactor

higherexplanatorypower(notassured)

morecomplexityandexpensive

Build-up

Simple

Canapplytocloselyheldcompanies.

Historicalvaluesmaynotberelevanttocurrentmarketconditions

3.Requiredreturnonequity

Summaryofcalculations:

CalculateERP(EquityRiskPremium)

Historicalestimate

Forward-lookingestimate

GGMestimate

Macroeconomicmodelestimate

Surveyestimate

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3.Requiredreturnonequity

Summaryofcalculations:

Calculaterequiredrateofreturn

CAPM

Activelytradedpubliccompany

AdjustedBeta

Tinytradedornonpubliccompany

Multifactormodel

Fama-Frenchmodel(FFM)

Pastor-Stambaughmodel(PSM)

MacroeconomicMultifactormodels

Build-upmethod

BondYield+RiskPremium

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4.InternationalConsideration

InternationalConsideration

Exchangeraterisk

Thevolatilityofexchangerateinfluencesthereturnonforeigninvestmentintermofhomecurrency;

Equityriskpremium=Equityriskpremiumforadevelopedmarket

+Countrypremium

CountrySpreadModel:useacorrespondingdevelopedmarketasabenchmarkandaddapremiumfortheemergingmarket.

Onepremiumisthedifferencebetweentheyieldonbonds

CountryRiskRatingModel:riskratings(publishedbyInstitutionalInvestor)forthosecountriesastheindependentvariable.

Dataandmodelissuesinemergingmarkets

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5.WACC

Thecostofcapitalismostcommonlyestimatedusingthecompany‘safter-taxweightedaveragecostofcapital,orweightedaveragecostofcapital(WACC)forshort.

Aweightedaverageofrequiredratesofreturnforthecomponentsourcesof

capital

MVD

MVCE

r(1-Taxrate)+

WACC=

r

d

ce

MVD+MVCE

MVD+MVCE

ThechangesincapitalstructureresultsinchangesinWACC.EliminatetheimpactfromfrequentchangesofcapitalstructureinestimatingWACC,thetarget

capitalstructureisusedtoestimatetheWACC.

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6.Discountrateselectioninrelationtocashflow

Beingusedasdiscountratesinvaluation,requiredreturnsneedtobedefinedappropriatelyrelativetothecashflowstobediscounted.

Cashflowtoequitytherequiredreturnonequity

Cashflowtothefirmthefirm‘scostofcapital(after-taxweightedaveragecostofcapital)

Whencashflowsarestatedinrealterms,amountsreflectoffsetsmadeforactualoranticipatedchangesinthepurchasingpowerofmoney

NominalcashflowsNominaldiscountrates

RealcashflowsRealdiscountrates

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SummaryofReadingsandFramework

SS10

R29EquityValuation:ApplicationsandProcesses

R30ReturnConcepts

SS11

R31TheFiveCompetitiveForcesthatShapeStrategy

R32YourStrategyNeedsaStrategy

R33IndustryandCompanyAnalysis

R34DiscountedDividendValuation

SS12

R35FreeCashFlowValuation

R36Market-BasedValuation:PriceandEnterpriseValueMultiples

R37ResidualIncomeValuation

R38PrivateCompanyValuation

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EquityValuation:Theframework

SecurityValuationandInvestmentDecision

EstimatedDollarAmount

EstimatedTimingScheme

ExpectedCashFlow

(DiscountedbyReq.RateofReturn)

PresentValue

>MarketValue

<MarketValue

Buy

Sell/ShortSell

ValuationProcess

TheTop-Down,Three-StepApproach

TheBottom-UpStockValuation,StockPickingApproach

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Step1:Global&Country

Analysis

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Step2:IndustryAnalysis

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IndustryAnalysis

Twocentralquestionsprovidethebasisforthefirm‘schoiceofacompetitivestrategy:

Industryattractiveness:istheindustryattractiveinthetermsoflong-termprofitpotential?

Competitiveadvantage:Howdoesthefirmcreatevalueforbuyers(inexcess

ofthecostofcreatingit),relativetootherplayersintheindustry.

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IndustryAnalysis:Porter'sFive-Forces

ThreatofNewEntrantsInTheIndustry

RivalryAmongExistingCompetitors

ThreatofSubstitutes

BargainingPowerofSuppliers

BargainingPowerofBuyers

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IndustryAnalysis:Porter'sFive-Forces

1.Threatofnewentrantsintheindustry

①Economiesofscale

②Productdifferencesandbrandidentity

③Switchingcosts

④Capitalrequirements

⑤Accesstodistributionchannels

⑥Governmentpolicy

⑦Costand/orqualityadvantages

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IndustryAnalysis:Porter'sFive-Forces

2.ThethreatofSubstituteProducts:

①Therelativepriceperformanceofsubstitutes;

②Buyerpropensitytosubstitute;

③Switchingcosts

Differentiatedindustryproductsthatarevaluedbycustomersreducethis

threat.

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IndustryAnalysis:Porter'sFive-Forces

3.BargainingPowerofBuyer:

①Bargainingleverage:relatescloselytofactors

affectingtheotherforces,suchaslowswitching

costsandreadilyavailablesubstitutesenhance

thebargainingpowerofbuyers.

②Thebuyer‘spricesensitivitydependsupon

qualitativefactors.

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IndustryAnalysis:Porter'sFive-Forces

4.BargainingPowerofSupplier:

①Differentiationofinputsthatareacceptabletotheindustry;

②Presenceofsubstituteinputsiscloselyrelatedto

thedifferentiationofinputs.

③Supplierconcentration.

④Importanceofvolumetothesupplier.

⑤Thethreatofforwardintegration.

⑥Switchingcosts.

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IndustryAnalysis:Porter'sFive-Forces

5.TheDegreeofRivalryAmongExistingCompetitors

①Numberofcompetitors.

②Industrygrowth.

③Ahighdegreeofoperatingorfinancialleverage.

④Participant‘scommitment.

⑤Productdifferences.

⑥Productshelflife.

⑦Theexistenceofexitbarriers.

⑧Theamountofinformationalcomplexity.

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FactorsAffectanIndustryonTemporaryBasis

Variousfactorsmayaffectanindustryonatemporarybasisbutnotdetermineindustryprofitabilityandstructureinthelongterm:

IndustryGrowthRate,acommonmistakeistoassumethatfast-growingindustriesarealwaysattractive.

TechnologyandInnovation,improvedtechnologydoesnotimproveprofitsifitattractscompetitors.

Government,thesecanbegoodorbadandarepronetochangethroughtime.

ComplementaryProducts,theseareproductsthatareusedinconjunctionwiththefirm‘sproducts(likehotdogsandbuns),andthesecanhaveapositiveornegativeeffect.Somecomplementscancreateorincreasebarriers

toentryandreducethetreatofsubstitutes.

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ChangesinIndustryStructureonLong-Term

Fiveforcesdriveanindustry‘sstructuralattractivenessandlong-termprofitability.

ChangesinThreatofNewEntrants

ChangesinPowerofSuppliersandBuyers

ChangesinThreatfromSubstitutes

ChangesinRivalry

StrategicAlternatives

Alertforfundamentalchangesthatcanaffectthestrengthorweaknessofthefiveforces.

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Positioningacompany

AlteringtheFirm‘sExistingPosition

Customerpower.

Supplierpower.

Substitutes.

Threatofentry.

Rivalry.

Capitalizing