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Equity Valuation, Relative Valuation, DCF Valuation, Enterprise/Firm…
Equity Valuation
Market price
Reflects all investors valuation of the stock
- Risk investors should hold is the market/systematic risk
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Enterprise/Asset based valuation: Focus more on valuing company as a whole, not just equity portion...
- Whole then subtract value of debt, then arrive at value of equity
- When we don't have historical information, future expectations/news of the firm...information is key in any valuation
Distressed firms: Company going bankrupt, wants to sell off parts of its company, (quite clear there's no future aspect, so they are trying to get rid of it now)
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Relative Valuation
Required Info:
Market Cap - Size: Small VS Large firm
- Small has higher financial risk, higher to obtain capital, financial constraints (similar to monthly income credit risk lvl)
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Capital structure (Aka Leverage) (D/E ratio)
- One uses 90% debt, 10% equity
- One uses 50% debt & equity
Default risk not the same...cost of capital...more debt is higher
Age:
- Young vs Old, young is riskier
Price-to-earnings: Stock price vs earnings per share (how much market is willing to pay based on $1 generated by the firm)
Disadvantages
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Using less info compared to DCF....
- Both ways
Positive - easier to value
Negative - less accurate?
Depends on market condition...
- Developed market - will be btr
- Developing/Emerging market prices generally more volatile/uncertain
Your ability to find similar companies
- How far/near should the comparable companies be? As it's impossible to have exactly same parameters
- What's the acceptable deviation eg. market cap...this gets less scientific...10%? 5%/20%?
When does it work best?
Larger number of comparable firms > btr avg
- Concept: Normally distribution...law of large observations(samples), average is more representative of the population, combatting observation biases
Securities should be actively traded - liquidity...price from 2 weeks ago is not going to be actual representation of current situation
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Advantages:
Incorporating what the market says in our valuation...DCF is not taking into consideration current market price...only company's fundamentals into the future
I'm not sure how accurate my valuation are, why not take into account current market's view
DCF Valuation
Why use it?
Most conventional, traditional approach in valuing stock
Value stocks (mature...MCD, KO) - streams of CF is stable...investors won't overpay
Growth stocks - investors will pay more, in expectation that they will generate huge growths CFs in future
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Disadvantages
Public information (everybody alr know where to get) would alr be reflected in market price, so your valuation wouldn't variate far from mkt price
How to go about this, get information that are less apparent to the public
- NLP, take what CEO says, measure his tone and choice of words, then convert into a parameter to make projections of companies' outlook
- Hedgefunds use satellite informations, tracking movements of trucks leaving warehouse, using this to project sales numbers...
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Asset-Based Valuation
Suitable for...
When firm is about to file for bankruptcy
- When they liquidate, how much assets are worth then on equities, how much debtholder & equityholder will get, make a recommendation
Big firm divesture, value that small segment to be gone
Comparing other firms in terms of value of assets, not price multiples