Equity Valuation: Dividend Discount Models
Equity Valuation
Lecture Map
Definitions of Value
Book value, Liquidation value, Intrinsic value, Market value
Dividend discount models
Constant-growth
Multi-stage growth
Value Metrics and Determinants of Value
Current earnings and growth
P/E
Lesmond
1
Book Value of Equity
The firm’s equity value, or stock value, is stated right on the firm’s books
This is NOT the market value of equity
Book value per share of Equity is the value of common equity on the books, divided by the number of shares
The value of Stockholder’s equity is in the section of the balance sheet called Liabilities and Owners’ Equity
Refer to the last set of pages for the Income
Statement, Balance Sheet, and CF Statement
Lesmond
2
Book Stockholder’s Equity
Derived from accounting rules
Simply the amount by which total assets exceed total liabilities, where total assets are generally valued at purchase price less depreciation
Some questions about the assets on the Balance Sheet?
Where is the
Where is the property? Where is the employees? Where is the suppliers? PV of the firm’s current projects? value of the firm’s patents and other intellectual value of the firm’s knowledge base, stored in its
value of the firm’s relationships with buyers and
Lesmond
3
Let’s check some numbers:
Assuming a price of $76.56 for Walmart as of September 4, 2014
Book Value of Equity?
Price to Book?
Price to Sales?
Price-to-EPS (P/E)?
Debt-to-Equity?
Return on Equity (ROE)?
Lesmond
4
Liquidation Value
The amount the firm could be sold for – either in pieces (sell off divisions or business lines) or as a whole.
Liquidation value can also mean the value of the actual assets of the firm, assuming we just shut down the business and sell the assets (this is a real floor on value). Question: In general, can you buy a firm for less than its liquidation value?
Can a firm be worth less than its book value?
Lesmond
5
Lecture Map
Definitions of Value
Book value, Liquidation value, Intrinsic value, Market value
Dividend discount models
Constant-growth
Multi-stage growth
Value Metrics and Determinants of Value
Current earnings and growth
P/E
Lesmond
1
Book Value of Equity
The firm’s equity value, or stock value, is stated right on the firm’s books
This is NOT the market value of equity
Book value per share of Equity is the value of common equity on the books, divided by the number of shares
The value of Stockholder’s equity is in the section of the balance sheet called Liabilities and Owners’ Equity
Refer to the last set of pages for the Income
Statement, Balance Sheet, and CF Statement
Lesmond
2
Book Stockholder’s Equity
Derived from accounting rules
Simply the amount by which total assets exceed total liabilities, where total assets are generally valued at purchase price less depreciation
Some questions about the assets on the Balance Sheet?
Where is the
Where is the property? Where is the employees? Where is the suppliers? PV of the firm’s current projects? value of the firm’s patents and other intellectual value of the firm’s knowledge base, stored in its
value of the firm’s relationships with buyers and
Lesmond
3
Let’s check some numbers:
Assuming a price of $76.56 for Walmart as of September 4, 2014
Book Value of Equity?
Price to Book?
Price to Sales?
Price-to-EPS (P/E)?
Debt-to-Equity?
Return on Equity (ROE)?
Lesmond
4
Liquidation Value
The amount the firm could be sold for – either in pieces (sell off divisions or business lines) or as a whole.
Liquidation value can also mean the value of the actual assets of the firm, assuming we just shut down the business and sell the assets (this is a real floor on value). Question: In general, can you buy a firm for less than its liquidation value?
Can a firm be worth less than its book value?
Lesmond
5