DOCSLIB.ORG

Common Stock Valuation

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Common Stock Valuation Chapter Common Stock Valuation McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Common Stock Valuation • Our goal in this chapter is to examine the methods commonly used by financial analysts to assess the economic value of common stocks. • These methods are grouped into three categories: – Dividend discount models – Residual Income models – Price ratio models 6-2 Security Analysis: Be Careful Out There • Fundamental analysis is a term for studying a company’s accounting statements and other financial and economic information to estimate the economic value of a company’s stock. • The basic idea is to identify “undervalued” stocks to buy and “overvalued” stocks to sell. • In practice however, such stocks may in fact be correctly priced for reasons not immediately apparent to the analyst. 6-3 The Dividend Discount Model • The Dividend Discount Model (DDM) is a method to estimate the value of a share of stock by discounting all expected future dividend payments. The basic DDM equation is: D(1) D(2) D(3) D(T) V(0) = + 2 + 3 + L T ()1+ k ()1+ k ()1+ k ()1+ k • In the DDM equation: – V(0) = the present value of all future dividends – D(t) = the dividend to be paid t years from now – k = the appropriate risk-adjusted discount rate 6-4 Example: The Dividend Discount Model • Suppose that a stock will pay three annual dividends of $200 per year, and the appropriate risk-adjusted discount rate, k, is 8%. • In this case, what is the value of the stock today? D(1) D(2) D(3) V(0) = + + ()1+ k ()1+ k 2 ()1+ k 3 $200 $200 $200 V(0) = + + = $515.42 ()1+ 0.08 ()1+ 0.08 2 ()1+ 0.08 3 6-5 The Dividend Discount Model: the Constant Growth Rate Model • Assume that the dividends will grow at a constant growth rate g. The dividend next period (t + 1) is: D()t + 1 = D(t)× (1 + g) So, D(2) = D(1) × (1 + g) = D(0) × (1 + g) × (1 + g) • For constant dividend growth, the DDM formula becomes: T D(0)(1+ g) ⎡ ⎛1+ g ⎞ ⎤ V(0) = ⎢1− ⎜ ⎟ ⎥ if k ≠ g k − g ⎣⎢ ⎝1+ k ⎠ ⎦⎥ V(0) = T ×D(0) if k = g 6-6 Example: The Constant Growth Rate Model • Suppose the current dividend is $10, the dividend growth rate is 10%, there will be 20 yearly dividends, and the appropriate discount rate is 8%. • What is the value of the stock, based on the constant growth rate model? T D(0)(1+ g) ⎡ ⎛1+ g ⎞ ⎤ V(0) = ⎢1− ⎜ ⎟ ⎥ if k ≠ g k − g ⎣⎢ ⎝1+ k ⎠ ⎦⎥ 20 $10 × ()1.10 ⎡ ⎛1.10 ⎞ ⎤ V()0 = ⎢1− ⎜ ⎟ ⎥ = $243.86 .08 −.10 ⎣⎢ ⎝1.08 ⎠ ⎦⎥ 6-7 The Dividend Discount Model: the Constant Perpetual Growth Model. • Assuming that the dividends will grow forever at a constant growth rate g. • For constant perpetual dividend growth, the DDM formula becomes: D()0 × (1+ g) D(1) V()0 = = (Important : g < k) k − g k − g 6-8 Example: Constant Perpetual Growth Model • Think about the electric utility industry. • In mid-2005, the dividend paid by the utility company, American Electric Power (AEP), was $1.40. • Using D(0)=$1.40, k = 7.3%, and g = 1.5%, calculate an estimated value for DTE. $1.40 × (1.015) V()0 = = $24.50 .073 −.015 Note: the actual mid-2005 stock price of AEP was $38.80. What are the possible explanations for the difference? 6-9 The Dividend Discount Model: Estimating the Growth Rate • The growth rate in dividends (g) can be estimated in a number of ways: – Using the company’s historical average growth rate. – Using an industry median or average growth rate. – Using the sustainable growth rate. 6-10 The Historical Average Growth Rate • Suppose the Kiwi Company paid the following dividends: – 2000: $1.50 2003: $1.80 – 2001: $1.70 2004: $2.00 – 2002: $1.75 2005: $2.20 • The spreadsheet below shows how to estimate historical average growth rates, using arithmetic and geometric averages. Year: Dividend: Pct. Chg: 2005 $2.20 10.00% 2004 $2.00 11.11% 2003 $1.80 2.86% Grown at 2002 $1.75 2.94% Year: 7.96%: 2001 $1.70 13.33% 2000 $1.50 2000 $1.50 2001 $1.62 2002 $1.75 Arithmetic Average: 8.05% 2003 $1.89 2004 $2.04 Geometric Average: 7.96% 2005 $2.20 6-11 The Sustainable Growth Rate Sustainable Growth Rate = ROE × Retention Ratio = ROE × (1 - Payout Ratio) • Return on Equity (ROE) = Net Income / Equity • Payout Ratio = Proportion of earnings paid out as dividends • Retention Ratio = Proportion of earnings retained for investment 6-12 Example: Calculating and Using the Sustainable Growth Rate • In 2005, American Electric Power (AEP) had an ROE of 14.59%, projected earnings per share of $2.94, and a per-share dividend of $1.40. What was AEP’s: – Retention rate? – Sustainable growth rate? • Payout ratio = $1.40 / $2.94 = .476 • So, retention ratio = 1 – .476 = .524 or 52.4% • Therefore, AEP’s sustainable growth rate = .1459 × 52.4% = 7.645% 6-13 Example: Calculating and Using the Sustainable Growth Rate, Cont. • What is the value of AEP stock, using the perpetual growth model, and a discount rate of 7.3%? • Recall the actual mid-2005 stock price of AEP was $38.80. $1.40 × (1.07645) V()0 = = −$436.82 << $38.80 .073 −.07645 • Clearly, there is something wrong because we have a negative price. • What causes this negative price? • Suppose the discount rate is appropriate. What can we say about g? 6-14 The Two-Stage Dividend Growth Model • The two-stage dividend growth model assumes that a firm will initially grow at a rate g1 for T years, and thereafter grow at a rate g2 < k during a perpetual second stage of growth. • The Two-Stage Dividend Growth Model formula is: T T D(0)(1+ g ) ⎡ ⎛ 1+ g ⎞ ⎤ ⎛ 1+ g ⎞ D(0)(1+ g ) V(0) = 1 ⎢1− ⎜ 1 ⎟ ⎥ + ⎜ 1 ⎟ 2 k − g1 ⎣⎢ ⎝ 1+ k ⎠ ⎦⎥ ⎝ 1+ k ⎠ k − g2 6-15 Using the Two-Stage Dividend Growth Model, I. • Although the formula looks complicated, think of it as two parts: – Part 1 is the present value of the first T dividends (it is the same formula we used for the constant growth model). – Part 2 is the present value of all subsequent dividends. • So, suppose MissMolly.com has a current dividend of D(0) = $5, which is expected to “shrink” at the rate g1 -- 10% for 5 years, but grow at the rate g2 = 4% forever. • With a discount rate of k = 10%, what is the present value of the stock? 6-16 Using the Two-Stage Dividend Growth Model, II. T T D(0)(1+ g ) ⎡ ⎛1+ g ⎞ ⎤ ⎛1+ g ⎞ D(0)(1+ g ) V(0) = 1 ⎢1− ⎜ 1 ⎟ ⎥ + ⎜ 1 ⎟ 2 k − g 1+ k 1+ k k − g 1 ⎣⎢ ⎝ ⎠ ⎦⎥ ⎝ ⎠ 2 5 5 $5.00(0.90) ⎡ ⎛ 0.90 ⎞ ⎤ ⎛ 0.90 ⎞ $5.00(1+ 0.04) V(0) = ⎢1− ⎜ ⎟ ⎥ + ⎜ ⎟ 0.10 − (−0.10) ⎣⎢ ⎝1+ 0.10 ⎠ ⎦⎥ ⎝1+ 0.10 ⎠ 0.10 − 0.04 = $14.25 + $31.78 = $46.03. • The total value of $46.03 is the sum of a $14.25 present value of the first five dividends, plus a $31.78 present value of all subsequent dividends. 6-17 Example: Using the DDM to Value a Firm Experiencing “Supernormal” Growth, I. • Chain Reaction, Inc., has been growing at a phenomenal rate of 30% per year. • You believe that this rate will last for only three more years. • Then, you think the rate will drop to 10% per year. • Total dividends just paid were $5 million. • The required rate of return is 20%. • What is the total value of Chain Reaction, Inc.? 6-18 Example: Using the DDM to Value a Firm Experiencing “Supernormal” Growth, II. • First, calculate the total dividends over the “supernormal” growth period: Year Total Dividend: (in $millions) 1 $5.00 x 1.30 = $6.50 2 $6.50 x 1.30 = $8.45 3 $8.45 x 1.30 = $10.985 • Using the long run growth rate, g, the value of all the shares at Time 3 can be calculated as: V(3) = [D(3) x (1 + g)] / (k – g) V(3) = [$10.985 x 1.10] / (0.20 – 0.10) = $120.835 6-19 Example: Using the DDM to Value a Firm Experiencing “Supernormal” Growth, III. • Therefore, to determine the present value of the firm today, we need the present value of $120.835 and the present value of the dividends paid in the first 3 years: D(1) D(2) D(3) V(3) V(0) = + + + ()1+ k ()1+ k 2 ()1+ k 3 ()1+ k 3 $6.50 $8.45 $10.985 $120.835 V(0) = + + + ()1+ 0.20 ()1+ 0.20 2 ()1+ 0.20 3 ()1+ 0.20 3 = $5.42 + $5.87 + $6.36 + $69.93 = $87.58 million. 6-20 Discount Rates for Dividend Discount Models • The discount rate for a stock can be estimated using the capital asset pricing model (CAPM ). • We will discuss the CAPM in a later chapter. • However, we can estimate the discount rate for a stock using this formula: Discount rate = time value of money + risk premium = U.S. T-bill rate + (stock beta x stock market risk premium) T-bill rate: return on 90-day U.S. T-bills Stock Beta: risk relative to an average stock Stock Market Risk Premium: risk premium for an average stock 6-21 Observations on Dividend Discount Models, I. Constant Perpetual Growth Model: • Simple to compute • Not usable for firms that do not pay dividends • Not usable when g > k • Is sensitive to the choice of g and k • k and g may be difficult to estimate accurately.
Load more

Recommended publications
  • Chapter 6 Common Stock Valuation End of Chapter Questions and Problems
    CHAPTER 6 Common Stock Valuation A fundamental assertion of finance holds that a security’s value is based on the present value of its future cash flows. Accordingly, common stock valuation attempts the difficult task of predicting the future. Consider that the average dividend yield for large-company stocks is about 2 percent. This implies that the present value of dividends to be paid over the next 10 years constitutes only a fraction of the stock price. Thus, most of the value of a typical stock is derived from dividends to be paid more than 10 years away! As a stock market investor, not only must you decide which stocks to buy and which stocks to sell, but you must also decide when to buy them and when to sell them. In the words of a well- known Kenny Rogers song, “You gotta know when to hold ‘em, and know when to fold ‘em.” This task requires a careful appraisal of intrinsic economic value. In this chapter, we examine several methods commonly used by financial analysts to assess the economic value of common stocks. These methods are grouped into two categories: dividend discount models and price ratio models. After studying these models, we provide an analysis of a real company to illustrate the use of the methods discussed in this chapter. 2 Chapter 6 6.1 Security Analysis: Be Careful Out There It may seem odd that we start our discussion with an admonition to be careful, but, in this case, we think it is a good idea. The methods we discuss in this chapter are examples of those used by many investors and security analysts to assist in making buy and sell decisions for individual stocks.
    [Show full text]
  • Before the Public Service Commission
    BEFORE THE PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA REBUTTAL TESTIMONY OF ROBERT B. HEVERT ON BEHALF OF SOUTH CAROLINA ELECTRIC & GAS COMPANY DOCKET NO. 2009-489-E TABLE OF CONTENTS I. INTRODUCTION........................................................................................................1 II. PURPOSE AND OVERVIEW OF TESTIMONY....................................................1 III. ROE RECOMMENDATION SUMMARY AND OVERVIEW..............................5 IV. RESPONSE TO THE DIRECT TESTIMONY OF MR. O’DONNELL AS IT RELATES TO THE COMPANY’S COST OF EQUITY ......................................12 Proxy Group Selection Criteria and Comparison Companies ..................................15 DCF Model Growth Rate Estimates ...........................................................................21 Relevance of Pension Funding Assumptions in Establishing the Company’s Return on Equity .....................................................................................................................35 Relevance and Application of the CAPM...................................................................46 Flotation Cost Adjustment ..........................................................................................49 V. RESPONSE TO DIRECT TESTIMONY OF MR. O’DONNELL AS IT RELATES TO THE COMPANY’S CAPITAL STRUCTURE ............................50 VI. UPDATED AND REVISED COST OF EQUITY ANALYSES ............................60 VII. CONCLUSION ..........................................................................................................61
    [Show full text]
  • CHAPTER 11 the GROWN-UPS: MATURE COMPANIES at Each Stage of the Life Cycle of the Firm, There Is Attrition
    CHAPTER 11 THE GROWN-UPS: MATURE COMPANIES At each stage of the life cycle of the firm, there is attrition. Most young companies fail to make it through early tests to become growth companies, and a large number of growth companies find that growth is short lived and either go out of business or are acquired by larger firms. In this chapter, we will focus on the companies that survive these grueling phases of competition and become mature companies: mature not only in terms of growth rates but also in terms of risk profiles and return characteristics. Companies in the mature phase of the life cycle should present the least problems in valuations. They have long periods of operating and market history, allowing us to estimate most of the inputs for valuation from historical data. They have also settled into established patterns of investment and financing, resulting in fundamentals (risk and returns) that are stable over time, giving us more confidence in our estimates of these numbers. It is, however, these established patterns that may present a problem, since not all long standing practice is good. Put another way, there are mature firms that make financing and investment choices that are not optimal or sensible, and have been doing so for long periods. It is possible, therefore, that these firms, with new management in place, could be run differently (and better) and have higher values. Analysts valuing mature companies have to juggle two values – the status quo value and an optimal value – and how they deal with them will in large part determine the quality of the valuation.
    [Show full text]
  • Valuation Methods
    30. August 2016 The Metzler Valuation Guide For valuating financial instruments, Metzler Research uses standard and widely accepted methods of funda- mental analysis such as DCF analysis, peer group Jürgen Pieper analysis, sum-of-the-parts analysis or relative value analysis. Quantitative and technical analyses can also be Head of Research included in the evaluation as well as intermarket analysis and behavioral finance approaches. The Metzler Valuation Guide describes the valuation principles and methods applied by Metzler Research. Guido Hoymann Discounted Cash Flow Model Head of Equity Research Dividend Discount Model Eugen Keller Peer group analysis Head of FI/FX Research Sum-of-the-parts analysis Intermarket analysis Relative value analysis Technical analysis Behavioral finance . Information for professional clients and eligible counterparties – not to be passed on to private clients 1 Contents Guide Discounted Cash Flow Model 3 Dividend Discount Model 9 Peer group analysis 13 Sum-of-the-parts analysis 15 Intermarket analysis 16 Relative value analysis 17 Technical analysis 18 Behavioral finance 19 Appendix Recommended literature 20 Information for professional clients and eligible counterparties – not to be passed on to private clients 2 Guide Discounted Cash Flow Model Since we consider the Discounted Cash Flow Model to be the most basic and most wide-spread valuation tool around, all fundamentals also relevant for the other models will be explained in this chapter, e.g. Capital Asset Pricing Model (CAPM) or cost of equity (COE). Discounted Cash Flow, WACC, CAPM, COE The DCF valuation method With our Discounted Cash Flow (DCF) valuation method we derive the enterprise value after taking into account a company’s long-term cash flows after investments used in order to generate this cash.
    [Show full text]
  • Sustainable Growth Rate and Firm Performance
    National Conference on Marketing and Sustainable Development October 13-14, 2017 Sustainable Growth Rate and Firm Performance K Subbareddy [email protected] M. Kishore Kumar Reddy Annamacharya Institute of Technology and Sciences Growth for business is significant especially for company’s goal because the company can maintain their performance without running into financial problems. Financial problems or financial distress can make the company not enough capital or financial resources to run company activities. This research investigates the association between firm performance and sustainable growth rate of HDFC bank. Methodology: The indicators for sustainable growth rate are calculated by using Return on Equity Ratio, dividend payout ratio, sustainable growth rate, return on asset , return on equity, debt equity, return on capital employed ratio Findings: The results found that there is a significant relationship between debt ratio, equity ratio, total asset turnover and size of the firm with sustainable growth rate. Practical Implications: The sustainable growth rate is one of the valuable financial tools especially for managers used to gauging financial and operating decision, whether to sustain, increase or decrease. Social Implications: The results of this study also enable the company to manage its financial and operating policy towards healthy growth without having additional financial problem. Research Limitations/Implications: This study focuses on all sectors except for financial sector of Bursa Malaysia to identify an implication to the role of debt and financing decisions for sustainable firm’s growth over 5 years period from 2012 until 2017. Originality/Value: Our results are suitable for bank to manage their solid performance to sustain firm’s growth in the future undertakings.
    [Show full text]
  • Growth and Value: Past Growth, Predicted Growth and Fundamental Growth
    1 Growth and Value: Past growth, predicted growth and fundamental growth Aswath Damodaran Stern School of Business June 2008 2 Growth and Value: Past growth, predicted growth and fundamental growth A key input, when valuing businesses, is the expected growth rate in earnings and cash flows. Allowing for a higher growth rate in earnings usually translates into higher value for a firm. But why do some firms grow faster than others? In other words, where does growth come from? In this paper, we argue that growth is not an exogenous input subject to the whims and fancies of individual analysts, but has to be earned by firms. In particular, we trace earnings growth back to two forces: investment in new assets, also called sustainable growth, and improving efficiency on existing assets, which we term efficiency growth. We use this decomposition of growth to examine both historical growth rates in earnings across firms and the link between value and growth. We close the paper by noting that the relationship between growth and value is far more nuanced than most analysts assume, with some firms adding value as they grow, some staying in place and some destroying value. 3 Growth is a central input in the valuation of businesses. In discounted cash flow models, it is the driver of future cash flows and by extension the value of these cash flows. In relative valuation, it is often the justification that is offered for why we should pay higher multiples of earnings or book value for some firms than for others. Given its centrality in valuation, it is surprising how ad hoc the estimation of growth is in many valuations and how little we know about its history, origins and relationship to value.
    [Show full text]
  • Before the Public Service Commission of South Carolina Docket No. 2011
    BEFORE THE PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA DOCKET NO. 2011-271-E In the Matter of: ) ) CORRECTED Application of Duke Energy Carolinas, ) REBUTTAL TESTIMONY OF LLC for Authority to Adjust and Increase ) ROBERT B. HEVERT FOR Its Electric Rates and Charges ) DUKE ENERGY CAROLINAS, LLC ) TABLE OF CONTENTS I. INTRODUCTION....................................................................................................................3 II. RESPONSE TO THE DIRECT TESTIMONY OF MR. O’DONNELL ............................7 III. RESPONSE TO MR. CHRISS .............................................................................................40 IV. CONCLUSIONS ....................................................................................................................42 I. INTRODUCTION 1 Q. ARE YOU THE SAME ROBERT B. HEVERT WHO PREVIOUSLY FILED 2 DIRECT TESTIMONY IN THIS PROCEEDING? 3 A. Yes. I provided Direct Testimony on behalf of Duke Energy Carolinas, LLC (“Duke 4 Energy Carolinas”, or the “Company”) a subsidiary of Duke Energy Corporation (“Duke 5 Energy”). 6 Q. PLEASE STATE THE PURPOSE OF YOUR REBUTTAL TESTIMONY. 7 A. The purpose of my Rebuttal Testimony is to respond to the Direct Testimonies Mr. Kevin 8 W. O‟Donnell on behalf of the South Carolina Energy Users Committee and Mr. Steve 9 W. Chriss on behalf of Wal-Mart Stores East, LP and Sam‟s East, Inc. (collectively, the 10 “Opposing ROE Witnesses”). 11 Q. HAVE YOU PREPARED ANY REBUTTAL EXHIBITS? 12 A. Yes. Rebuttal Exhibit No. RBH-1 through Rebuttal Exhibit No. RBH-14
    [Show full text]
  • Before the Public Service Commission of South Carolina Docket No. 2011
    BEFORE THE PUBLIC SERVICE COMMISSION OF SOUTH CAROLINA DOCKET NO. 2011-271-E In the Matter of: ) ) Application of Duke Energy Carolinas, ) REBUTTAL TESTIMONY OF LLC for Authority to Adjust and Increase ) ROBERT B. HEVERT FOR Its Electric Rates and Charges ) DUKE ENERGY CAROLINAS, LLC ) ) TABLE OF CONTENTS I. INTRODUCTION....................................................................................................................3 II. RESPONSE TO THE DIRECT TESTIMONY OF MR. O’DONNELL ............................8 III. RESPONSE TO MR. CHRISS .............................................................................................42 IV. CONCLUSIONS ....................................................................................................................44 I. INTRODUCTION 1 Q. ARE YOU THE SAME ROBERT B. HEVERT WHO PREVIOUSLY FILED 2 DIRECT TESTIMONY IN THIS PROCEEDING? 3 A. Yes. I provided Direct Testimony on behalf of Duke Energy Carolinas, LLC (“Duke 4 Energy Carolinas”, or the “Company”) a subsidiary of Duke Energy Corporation (“Duke 5 Energy”). 6 Q. PLEASE STATE THE PURPOSE OF YOUR REBUTTAL TESTIMONY. 7 A. The purpose of my Rebuttal Testimony is to respond to the Direct Testimonies Mr. Kevin 8 W. O’Donnell on behalf of the South Carolina Energy Users Committee and Mr. Steve 9 W. Chriss on behalf of Wal-Mart Stores East, LP and Sam’s East, Inc. (collectively, the 10 “Opposing ROE Witnesses”). 11 Q. HAVE YOU PREPARED ANY REBUTTAL EXHIBITS? 12 A. Yes. Rebuttal Exhibit No. RBH-1 through Rebuttal Exhibit No. RBH-14 have
    [Show full text]
  • The Level and Persistence of Growth Rates
    THE JOURNAL OF FINANCE VOL. LVIII, NO. 2 APRIL 2003 The Level and Persistence of Growth Rates LOUIS K. C. CHAN, JASON KARCESKI, and JOSEF LAKONISHOK n ABSTRACT Expectations about long-term earnings growth are crucial to valuation mod- els and cost of capital estimates.We analyze historical long-term growth rates across a broad cross section of stocks using several indicators of operating performance.We test for persistence and predictability in growth.While some ¢rms have grown at high rates historically, they are relatively rare instances. There is no persistence in long-term earnings growth beyond chance, and there is low predictability even with a wide variety of predictor variables. Spe- ci¢cally, IBES growth forecasts are overly optimistic and add little predictive power.Valuation ratios also have limited ability to predict future growth. THE EXPECTED RATE of growth in future cash £ows (usually proxied by accounting earnings) plays a pivotal role in ¢nancial management and investment analysis. In the context of aggregate market valuation, for example, projections about fu- ture growth are instrumental in predicting the equity risk premium. Much cur- rent controversy surrounds the appropriate level of the equity risk premium, as well as whether recent market valuation levels (at least as of year-end 1999) can be justi¢ed (Asness (2000), Welch (2000), Fama and French (2002)). Debate also revolves around how much of the performance of equity asset classes, such as large glamour stocks, can be attributed to changes in pro¢tability growth (Fama and French (1995), Chan, Karceski, and Lakonishok (2000)).When applied to the valuation of individual stocks, projected growth rates have implications for the cross-sectional distribution of cost of capital estimates (Fama and French (1997), Claus and Thomas (2001), Gebhardt, Lee, and Swaminathan (2001)), as well as widely followed valuation ratios like price-to-earnings and price-to-book ratios.
    [Show full text]
  • Niagara Mohawk Power Corporation D/B/A National Grid PROCEEDING
    Niagara Mohawk Power Corporation d/b/a National Grid PROCEEDING ON MOTION OF THE COMMISSION AS TO THE RATES, CHARGES, RULES AND REGULATIONS OF NIAGARA MOHAWK POWER CORPORATION FOR ELECTRIC AND GAS SERVICE Rebuttal Testimony and Exhibits of: Robert B. Hevert Mustally A. Hussain Dr. Ronald White Book 2 September 25, 2012 Submitted to: New York State Public Service Commission Case 12-E-0201 Case 12-G-0202 Submitted by: Niagara Mohawk Power Corporation Rebuttal Testimony of Robert B. Hevert Before the Public Service Commission NIAGARA MOHAWK POWER CORPORATION D/B/A NATIONAL GRID Rebuttal Testimony of Robert B. Hevert Case 12-E-0201 Case 12-G-0202 1 Case 12-E-0201 Case 12-G-0202 Rebuttal Testimony of Robert B. Hevert TABLE OF CONTENTS I. Witness Identification................................................................................1 II. Summary and Overview............................................................................4 III. Capital Market Conditions .....................................................................10 IV. Response to the Direct Testimony of Staff Witness Kwaku Duah ......13 A. Proxy Group Selection and Composition ......................................14 B. Application of the Multi-Stage DCF Model ..................................14 C. Risk-Free Rate Component of the Capital Asset Pricing Model ...43 D. Market Risk Premium Used in CAPM ..........................................48 E. Beta Coefficients Used in CAPM..................................................51 F. Business Risks ...............................................................................57 V. Summary and Conclusions......................................................................59 2 Case 12-E-0201 Case 12-G-0202 Rebuttal Testimony of Robert B. Hevert 1 I. Witness Identification 2 Q. Please state your name, affiliation, and business address. 3 A. My name is Robert B. Hevert. I am Managing Partner of Sussex 4 Economic Advisors, LLC and, in this proceeding, serve as an Executive 5 Advisor to Concentric Energy Advisors, Inc.
    [Show full text]
  • DYNASTY CERAMIC PCL Date: 21/12/2014 Current Price: THB 55.75 Target Price: THB 41.50 Ticker: DCC (SET) USD 1.00: THB 32.85 Recommendation: SELL (25.6% Downside)
    CFA Institute Research Challenge Hosted by CFA Society of Thailand Thammasat University Industry: Property Construction Thammasat University Student Research Sector: Construction Material This report is published for educational purposes only by students competing on the CFA Institute Research Challenge. DYNASTY CERAMIC PCL Date: 21/12/2014 Current Price: THB 55.75 Target Price: THB 41.50 Ticker: DCC (SET) USD 1.00: THB 32.85 Recommendation: SELL (25.6% Downside) Company Overview Investment Highlights Founded in 1989, Dynasty Ceramic PCL We place a “SELL” recommendation. Despite the high Return on Equity (“ROE”) and solid financial (“DCC” or the “Company”) is one of the position, the absence of future growth opportunities as well as the intensifying competition largest tile manufacturers and distributors implies that past stellar performance is unlikely to repeat again. With our valuation using of ceramic tiles in Thailand. Listed on the Stock Exchange of Thailand in 1992. As of Dividend Discount Model (“DDM”) and Free Cash Flow to Firm (“FCFF”) model, the one-year December 2014, DCC operates 195 outlets target price is THB 41.50, which leads to our final recommendation. nationwide targeting low-to middle-income Limited ability to drive sales through store expansion leads to greater reliance on same store customer segments mainly in provincial areas. sales growth: With 195 stores covering almost all 77 provinces throughout Thailand, the Company is likely to experience difficulties in expanding its branch network. The declining trend DCC Relative to SET Index in the number of new stores opened annually from 10 stores in 2012 to only 4 stores in 2013 15% indicates deteriorating expansion opportunity.
    [Show full text]
  • An Entropy-Based Analysis of Financial Competitiveness of Nordic Manufacturing Firms
    An entropy-based analysis of financial competitiveness of Nordic manufacturing firms Stefan Petrov Bachelor's thesis January 2020 School of Business Degree Programme in International Business Description Petrov, Stefan An entropy-based analysis of financial competitiveness of Nordic manufacturing firms Jyväskylä: JAMK University of Applied Sciences, January 2021, 53 pages. School of Business. Degree Programme in International Business. Bachelor's thesis. Permission for web publication: Yes Language of publication: English Abstract Financial competitiveness is an essential part of the health and growth of firms. However, it is a relatively new phenomenon and is not yet well-researched. In this regard, the current study investigates whether the financial competitiveness of Nordic manufacturing firms is affected by stock market performance, financial risk, and corporate governance indicators. Thus, the author has three aims in mind. First, to form an understanding of the phenomena of financial competitiveness. Second, to establish factors affecting financial competitiveness. Third, to test and improve an existing model of evaluating financial competitiveness through entropy. A quantitative approach shaped the research methodology. The secondary data was accumulated across four accounting phenomena: financial performance, corporate governance, stock market performance, and financial risk exposure. The total sample size extended to 513 firm-year observations from 2013-2018 across the 96 publicly traded manufacturing firms of Finland, Sweden, Norway, and Denmark. The author obtained the stock market data from Nasdaq Stockholm, Oslo Stock Exchange, Nasdaq Copenhagen, and Nasdaq OMX Helsinki. The data related to the accounting and corporate governance variables have been extracted from the sample firms' annual reports. The present study applies the entropy method to the sample to evaluate financial competitiveness at the firm-level.
    [Show full text]