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49 Equity Valuation: Concepts and Basic Tools (Background for DDM: Stock…
49 Equity Valuation: Concepts and Basic Tools
Evaluate a Security
Intrinsic value vs. Market price
Major Categories of Equity Valuation Models
Discounted cash flow models
Multiplier models
Asset-based models
Background for DDM: Stock Dividends
Dividend
Stock dividends
Extra dividend or special dividend
Stock split/ Reverse stock split
Background for DDM: Share Repurchase
Dividend Payment Chronology
Declaration date
Ex-dividend date
Holder-of-record date
Payment date
Discounted Cash Flow Models
Valuing preferred stock
Dividend discount model (DDM)
Gordon growth dividend discount model (GGM)
Assumptions
dividends grow at a constant rate
the constant growth rate will continue for an infinite period
the required rate of return r is greater than the infinite growth rate
Limitations
very sensitive to estimates of r and g
difficult with non-dividend stocks
difficult with unpredictable growth patterns
free cash flow to equity
Price Multiple Approach
Price multiples based on comparables
Multiples based on fundamentals
Leading P/E
Trailing P/E
Asset-Based Valuation
estimates of the market or fair value of the company's assets and liabilities
used for valuation of private companies
Comparison of the Three Valuation Methods