week 8 notes Equity Valuation
week 8 notes Equity Valuation FIN302
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This 2 page Class Notes was uploaded by odette antabi on Tuesday February 23, 2016. The Class Notes belongs to FIN302 at University of Miami taught by Stuart Webb in Fall 2015. Since its upload, it has received 20 views. For similar materials see Fundamentals of Finance in Finance at University of Miami.
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Date Created: 02/23/16
Equity Valuation Equity securities Basic Facts – Stocks are equity securities certificates of ownership in a corporation Households hold the largest share of equity securities, more than 36% of corporate equity Pension funds are largest institutional investors in equities (21%), followed by mutual funds (20%), and foreign investors (10%) Common Stock and Preferred Stock Represent ownership interest in a corporation Are the two most frequently used types of equity securities. Dividend payments do not affect a firm’s taxes and are not “guaranteed” but are “promised” to preferred stockholders. Have limited liability so claims made against the corporation cannot include a stockholder’s personal assets. Are generally viewed as perpetuities because they do not have maturity dates. Common stock – Is the basic ownership claim in a corporation – Has the right to vote on matters such as electing a board of directors, setting a capital budget, and proposed mergers or acquisitions – Has the right to a firm’s residual assets after creditors, preferred stockholders, and others with higher priority claims have been satisfied Warren Buffet Intrinsic value (or fundamental value) is an all important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.” Valuation Based on Comparable Firms Estimate Stock price based on the price of comparable firms – Match on characteristics including industry, cost structure, capital structure, growth potential, lifecycle and presence or absence of strategic/growth options. – – But no two investments are identical you must assess the extent to which the differences across assets are likely to have a material effect on the valuation multiples and adjust. Where does growth come from? Growth comes from earning a high return on reinvested earnings b is the percentage of earnings that are not paid as dividends – reinvestment rate – ROI is the return on – Growth rate g = b x ROI – ROE = return on investment within the firm