Asset Liquidity and the Cost of Capital
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Dividend Valuation Models Prepared by Pamela Peterson Drake, Ph.D., CFA
Dividend valuation models Prepared by Pamela Peterson Drake, Ph.D., CFA Contents 1. Overview ..................................................................................................................................... 1 2. The basic model .......................................................................................................................... 1 3. Non-constant growth in dividends ................................................................................................. 5 A. Two-stage dividend growth ...................................................................................................... 5 B. Three-stage dividend growth .................................................................................................... 5 C. The H-model ........................................................................................................................... 7 4. The uses of the dividend valuation models .................................................................................... 8 5. Stock valuation and market efficiency ......................................................................................... 10 6. Summary .................................................................................................................................. 10 7. Index ........................................................................................................................................ 11 8. Further readings ....................................................................................................................... -
How Do Underwriters Value Initial Public Offerings?: an Empirical Analysis of the French IPO Market
How Do Underwriters Value Initial Public Offerings?: An Empirical Analysis of the French IPO Market Peter Roosenboom* RSM Erasmus University JEL classification: G24, G32 Keywords: Initial public offerings, valuation * Corresponding author. The usual disclaimer applies. Correspondence address: Department of Financial Management, Rotterdam School of Management, Erasmus University Rotterdam, PO Box 1738, 3000 DR Rotterdam, The Netherlands. Phone: +31 10 408 1255, Fax: +31 10 408 9017, Email: [email protected]. I thank Martine Cools, Tjalling van der Goot, Frank Hartmann, Abe de Jong, Gerard Mertens, Peter Pope, Willem Schramade, Jeroen Suijs and Frank Verbeeten and several anonymous underwriters for their helpful suggestions. How Do Underwriters Value Initial Public Offerings?: An Empirical Analysis of the French IPO Market Abstract This paper investigates how French underwriters value the stocks of companies they bring public. Underwriters often use several valuation methods to determine their fair value estimate of the IPO firm’s equity. We investigate five of these valuation methods: peer group multiples valuation, the dividend discount model, the discounted cash flow model, the economic value added method, and underwriter-specific methods. We document that underwriters base their choice for a particular valuation method on firm characteristics, aggregate stock market returns and aggregate stock market volatility in the period before the IPO. In addition, we examine how underwriters combine the value estimates of the valuation methods they use into a fair value estimate by assigning weights to these value estimates. We document that these weights also depend on firm-specific factors, aggregate stock market returns and aggregate stock market volatility. Finally, we document that underwriters discount their fair value estimate to set the preliminary offer price of the shares. -
15.401 Finance Theory I, Equities
15.401 15.40115.401 FinanceFinance TheoryTheory MIT Sloan MBA Program Andrew W. Lo Harris & Harris Group Professor, MIT Sloan School Lecture 7: Equities © 2007–2008 by Andrew W. Lo Critical Concepts 15.401 Industry Overview The Dividend Discount Model DDM with Multiple-Stage Growth EPS and P/E Growth Opportunities and Growth Stocks Reading Brealey, Myers and Allen, Chapter 4 © 2007–2008 by Andrew W. Lo Lecture 7: Equities Slide 2 Industry Overview 15.401 What Is Common Stock? Equity, an ownership position, in a corporation Payouts to common stock are dividends, in two forms: – Cash dividends – Stock dividends Unlike bonds, payouts are uncertain in both magnitude and timing Equity can be sold (private vs. public equity) Key Characteristics of Common Stock: Residual claimant to corporate assets (after bondholders) Limited liability Voting rights Access to public markets and ease of shortsales © 2007–2008 by Andrew W. Lo Lecture 7: Equities Slide 3 Industry Overview 15.401 The Primary Market (Underwriting) Venture capital: A company issues shares to special investment partnerships, investment institutions, and wealthy individuals Initial public offering (IPO): A company issues shares to the general public for the first time (i.e., going public) Secondary or seasoned equity offerings (SEO): A public company issues additional shares Stock issuance to the general public is usually organized by an investment bank who acts as an underwriter: it buys part or all of the issue and resells it to the public Secondary Market (Resale Market) Organized exchanges: NYSE, AMEX, NASDAQ, etc. Specialists, broker/dealers, and electronic market-making (ECNs) OTC: NASDAQ © 2007–2008 by Andrew W. -
Lecture Note Packet 1 Intrinsic Valuation
Aswath Damodaran 1 Valuation: Lecture Note Packet 1 Intrinsic Valuation Aswath Damodaran Updated: September 2016 The essence of intrinsic value 2 ¨ In intrinsic valuation, you value an asset based upon its fundamentals (or intrinsic characteristics). ¨ For cash flow generating assets, the intrinsic value will be a function of the magnitude of the expected cash flows on the asset over its lifetime and the uncertainty about receiving those cash flows. ¨ Discounted cash flow valuation is a tool for estimating intrinsic value, where the expected value of an asset is written as the present value of the expected cash flows on the asset, with either the cash flows or the discount rate adjusted to reflect the risk. Aswath Damodaran 2 The two faces of discounted cash flow valuation 3 ¨ The value of a risky asset can be estimated by discounting the expected cash flows on the asset over its life at a risk-adjusted discount rate: where the asset has an n-year life, E(CFt) is the expected cash flow in period t and r is a discount rate that reflects the risk of the cash flows. ¨ Alternatively, we can replace the expected cash flows with the guaranteed cash flows we would have accepted as an alternative (certainty equivalents) and discount these at the riskfree rate: where CE(CFt) is the certainty equivalent of E(CFt) and rf is the riskfree rate. Aswath Damodaran 3 Risk Adjusted Value: Two Basic Propositions 4 ¨ The value of an asset is the risk-adjusted present value of the cash flows: 1. The “IT” proposition: If IT does not affect the expected cash flows or the riskiness of the cash flows, IT cannot affect value. -
Asset Management Companies Valuation
THE VALUATION OF ASSET MANAGEMENT COMPANIES Prof. Roberto Moro Visconti – Università Cattolica del Sacro Cuore, Milano, Italy [email protected] Abstract Asset management firms are characterized by having quite high margins, although working in a highly competitive industry. However, the nature of their businesses makes it difficult to define both debt and reinvestment, making the estimation of cash flows much more difficult. It is reasonable to assume that Free Cash Flows to Equity-holders (FCFE) are proxied by net earnings because of a negligible level of investments, depreciation, and net working capital. For Asset Management firms, dividends are often the only tangible cash flow that we can observe or estimate. The common methods used to value asset management firms are the discounted cash flow, the multiples, and the Dividend Discount Model, with some adaptions. Despite their simplicity, rules of thumbs are often characterized by the inaccuracy of the final value. Keywords : Assets under Management, Discounted Cash Flows, Dividend Discount Model, 1 multiples, rules of thumb, fees. 1. Framework Asset Management companies can be independent investment companies or a part of a bank; they usually do not invest in their own account but on behalf of their clients. This is one distinguished difference between asset management companies with other financial institutions such as commercial banks, investment banks, or insurers (Elliott, 2014). MorningStar defines investment management firms as “firms offering diversified services such as asset administration, investment advice, portfolio or mutual fund management, money management, venture capital, and investment research”. According to the recent academic literature, the three methods commonly used for the valuation of the asset management firms are: 1. -
The Reliability of Constant Growth Dividend Discount Model (DDM)
onomic c s & f E o M Gacus and Hinlo, Int J Econ Manag Sci 2018, 7:1 l a a n n a r g u e DOI: 10.4172/2162-6359.1000487 o m J International Journal of Economics & e l n a t n S o i c t i a ISSN: 2162-6359 e n n r c e t e s n I Management Sciences Research Article Open Access Research Article Open Access The Reliability of Constant Growth Dividend Discount Model (DDM) in Valuation of Philippine Common Stocks Roy Bornilla Gacus1* and Jennifer E Hinlo2 1Department of Agricultural Economics, University of Southern Mindanao, USM Avenue, Brgy Poblacion, Kabacan, Cotabato 9407, Philippines 2Department of Economics, School of Applied Economics, University of Southeastern Philippines, Obrero, Davao City, Philippines Abstract The constant growth dividend discount model (DDM) is said to be the simplest and most popular valuation method to estimate the intrinsic value of the company’s stocks. This study is aimed to test the reliability of the constant growth DDM in valuation of the selected common stock listed companies in the Philippine Stock Exchange (PSE). The accuracy of constant growth DDM to predict the value of common stocks was compared from the actual values using the symmetric median absolute percentage error (sMdAPE), and then tested whether the median difference between the predicted and actual values of the selected common stock listed companies were significant using the Wilcoxon signed-rank test. Results of the study showed that majority of the companies had a sMdAPE less than 30%. This means that the error to predict the common stock values among the companies was less than 30%. -
Dividend-Decisions.Pdf
CHAPTER 9 DIVIDEND DECISIONS LEARNING OUTCOMES Understand the Meaning of Dividend Decision Understand the importance of Dividend Decision Discuss various Forms of Dividend Discuss various Determinants of Dividend Explain various theories of Dividend Decisions. Financing Decision Theories Financial Investment Decision Decision 1. M. M. Hypothesis 2. Walter Model Dividend Decision 3. Gordon Model 4. Traditional theory 5. Linter Model © The Institute of Chartered Accountants of India 9.2 FINANCIAL MANAGEMENT 9.1 INTRODUCTION Financial management is the process of making financial decisions. Financial decision broadly covers three areas: i. Financing decision ii. Investment decision iii. Dividend decision Dividend decision is one of the most important areas of management decisions. It is easy to understand but difficult to implement. Let’s understand this with the help of an example, suppose a company, say X limited, which is continuously paying the dividend at a normal growth rate, earns huge profits this year. Now the management has to decide whether continue to pay dividend at normal rate or to pay at an increasing rate? Why this dilemma? The reason is that, if the management decides to pay higher dividend, then it might be possible that next year, the company will not achieve such higher growth rate, resulting the next year’s dividend will be low as compared to last year’s. However, if the company decides to stay on the normal rate of dividend then surplus amount of retained earnings would remain idle which will result in over capitalization, if no opportunity existing to utilize the funds. Also there are more factors which will affect the dividend decision (will be discussed later). -
Dividend Discount Models
ch13_p323-350.qxp 12/5/11 2:14 PM Page 323 CHAPTER 13 Dividend Discount Models n the strictest sense, the only cash flow you receive from a firm when you buy I publicly traded stock in it is a dividend. The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected dividends on it. While many analysts have turned away from the dividend discount model and view it as outmoded, much of the intuition that drives discounted cash flow valuation stems from the dividend discount model. In fact, there are compa- nies where the dividend discount model remains a useful tool for estimating value. This chapter explores the general model as well as specific versions of it tailored for different assumptions about future growth. It also examines issues in using the dividend discount model and the results of studies that have looked at its efficacy. THE GENERAL MODEL When an investor buys stock, he or she generally expects to get two types of cash flows—dividends during the period the stock is held and an expected price at the end of the holding period. Since this expected price is itself determined by future dividends, the value of a stock is the present value of dividends through infinity: ∞ t= E(DPS ) Value per share of stock = ∑ t + t t=1 ()1 ke = where DPSt Expected dividends per share = ke Cost of equity The rationale for the model lies in the present value rule—the value of any asset is the present value of expected future cash flows, discounted at a rate appropriate to the riskiness of the cash flows being discounted. -
Five-Minute-Mba-In-Corporate-Finance
GetPedia : Get How Stuff Works! Works! Welcome To GetPedia.com The Online Information Resource Providing You the Most Unique Content and Genuine Articles in the most Widest range categories. Browse and discover Information in each and every category. There are currently more than 500,000 articles to browse for. Business Communications Health & Fitness Advertising Broadband Internet Acne Branding Mobile & Cell Phone Aerobics & Cardio Business Management VOIP Alternative Medicine Business Ethics Video Conferencing Beauty Tips Careers, Jobs & Employment Satellite TV Depression Customer Service Diabetes Reference & Education Marketing Exercise & Fitness Networking Book Reviews Fitness Equipment Network Marketing College & University Hair Loss Pay-Per-Click Advertising Psychology Medicine Presentation Science Articles Meditation Public Relations Food & Drinks Muscle Building & Sales Bodybuilding Sales Management Coffee Nutrition Sales Telemarketing Cooking Tips Nutritional Supplements Sales Training Recipes & Food and Drink Weight Loss Small Business Wine & Spirits Yoga Strategic Planning Home & Family Entrepreneur Recreation and Sport Negotiation Tips Crafts & Hobbies Fishing Team Building Elder Care Golf Top Quick Tips Holiday Martial Arts Home Improvement Internet & Businesses Online Motorcycle Home Security Affiliate Revenue Interior Design & Decorating Self Improvement & Motivation Blogging, RSS & Feeds Landscaping & Gardening Attraction Domain Name Babies & Toddler Coaching E-Book Pets Creativity E-commerce Parenting Dealing with Grief -
Chapter 6 Fundamentals of Corporate Finance Valuing Stocks
Chapter 6 Fundamentals of Corporate Finance Valuing Stocks Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved 6- 2 Topics Covered Stocks and the Stock Market Book Values, Liquidation Values and Market Values Valuing Common Stocks Simplifying the Dividend Discount Model Growth Stocks and Income Stocks There are no free lunches on Wall Street Market Anomilies and Behavioral Finance McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved 6- 3 Stocks & Stock Market Primary Market - Place where the sale of new stock first occurs. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a firm that has already been through an IPO McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved 6- 4 Stocks & Stock Market Common Stock - Ownership shares in a publicly held corporation. Secondary Market - market in which already issued securities are traded by investors. Dividend - Periodic cash distribution from the firm to the shareholders. P/E Ratio - Price per share divided by earnings per share. McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved 6- 5 Stocks & Stock Market Book Value - Net worth of the firm according to the balance sheet. Liquidation Value - Net proceeds that would be realized by selling the firm’s assets and paying off its creditors. Market Value Balance Sheet - Financial statement that uses market value of assets and liabilities. McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. -
An Alternative to the Pure Dividend Discount Model
An Alternative to the Pure Dividend Discount Model William Carlson, Palumbo/Donahue School of Business, Duquesne University Conway Lackman, Palumbo/Donahue School of Business, Duquesne University ABSTRACT The pure dividend model cannot be used to analyze stocks with a zero or nominal dividend payout. Given the recent global financial crisis, this deficiency could exacerbate future global crises. The multiplier model redeveloped here is a general model capable of analyzing such stocks. Two stage models can give the same results as multistage models with fewer assumptions. Graham and Dodd (1962) estimated a multiplier of about 15 for the average S and P stock. Our update of their results gives a multiplier estimate of 16.4. They used data from 1871 to 1960 for their estimate. We added 1961-94 and 2005-1H06 in our update excluding 1995-2004 which was distorted by the dot.com bubble. Two useful by-product results emerged. It is estimated that the historic value of (kM–gM) is .0354. The terminal market growth rate gM was estimated to be .0711. Combining these two estimates gives an estimate of .1065 for kM which is a key number in the security market line equation. Keywords: Dividend policy, dividend models INTRODUCTION The simple (DDM) dividend discount model P = Do (1+g) / (k–g) cannot be used for high growth companies when the growth rate g exceeds the discount rate k. Accordingly, two and three stage models have been created to solve the problem. In turn there are two versions of the multistage model. One, presented in Reilly and Norton can be called the pure dividend discount model. -
CFA Institute Research Challenge
CFA Institute Research Challenge Hosted by CFA Society Greece University of Piraeus The CFA Institute Research Challenge is a global competition that tests the equity research and valuation, investment report writing, and presentation skills of university students. The following report was prepared in compliance with the Official Rules of the CFA Research Challenge, is submitted by a team of university students as part of this annual educational initiative and should not be considered a professional report. Disclosures: Ownership and material conflicts of interest: The authors, or a member of their household, of this report do not hold a financial interest in the securities of this company. The authors, or a member of their household, of this report do not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the authors of this report is not based on investment banking revenue. Position as an officer or director: The authors, or a member of their household, do not serve as an officer, director or advisory board member of the subject company. Market making: The authors do not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to be reliable, but the author do not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity.