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B294 - Unit 5 - Coggle Diagram
B294 - Unit 5
Session 1
Valuation of Bonds and Net Asset Value
Fundamental value
'Real value' to you
If > market price
Buy
If < market price
Do not buy or, sell if owned
Mathematical models can be used
Still includes
Unknown / uncertain data
Subjective assumptions
Trading and pricing bonds
Bonds are a loan from financial market
Not from bank
Investors supply a loan
Issuer contractually obliged to
Pay interest
Loan back on maturity date
Zero rate = face value
Fixed rate
=/= risk free
Floating rate = changable value
Risk exposure
Liquidity
When lender needs to sell before maturity date
Change in life circumstances
Reinvestment
Interest payments to be reinvested
Default
Issues goes bankrupt
No interest payments
No maturity payment
Stock valuation
Fundamental analysis
Considers
Future growth potential
Risk factors
Cash flows
Dividends
Markets make mistakes
Leads to
Under or overvalue
Opportunity to make profit
Search for value for money
Does not need to be good company
Net asset value approach
Total assets =
Total liabilities
'+ stockholders equity
Capital
Owner
Shareholders
Retained earnings
Current
Non-current
Nav per share =
(total assets - total liabilities) / number of shares outstanding
Stockholders equity / number of shares outstanding
Dividend valuation model
Relative valuation
Discounted cash flow valuation
Subjective
Interpretation of
Company reports
Interviews
Industry information
Macroeconomic conditions
Efficient market hypothesis
Stock prices accurately reflect all available information
Weak form
Historical data will not help beat the market
All decisions based on current info.
Semi-strong form
All publicly available information is instantly reflected in asset
prices
Strong form
All public and private info. is discounted in stock prices
Refuted as classified as insider trading
Illegal
Difficult to separate emotion
Session 2
Dividend discount models and relative valuation techniques
Investing linked with risk
Investors want premium in exchange
Comparable to risk free rate
Given by
Bank of England
Eurobank
Federal reserve (USA)
Market risk premium
Typically assumed 4-8%
Fear
Losing money
Greed
Desire for riches
Stocks
Increase in value for sale
Dividends
Regular payments
Gordon Growth Formula
Drastic changes in dividend amounts can
Create uncertainty
Create unrealistic expectations
Lead to investors selling shares
Constant dividend growth valuation model
Tries to establish a stable growth rate for divdends
Profitable projects should be prioritised over dividends
Cannot be negative or 0
Drawbacks
Ignores non-dividend paying companies value
Sensitive to small changes in input
Check different growth rates prior to decision-making
1% difference in growth can halve return
Said to be applicable to long-term stable businesses only
Relative valuation techniques
Comparisons between companies
Stock prices need to be standardised
Divide stock price by underpinning variable
Find companies in same industry for comparison
Aim to find similar
Growth potential
Difficult in practice
Risk characteristics
Weaknesses
Markets might be correct on average but misprice some stocks
Industry might be mispriced
Assumptions may be incorrect
Understanding of industry may be limited or wrong
Only as good as benchmark used
Must be compared against entire market
Session 3
Cash flow approach and real estate valuation
Discounted cash flow (DCF) analysis
Considred reliable
Cannot fake cash flow
Real estate markets
Local knowledge almost mandatory
Hence use of estate agents
Building regs
Rent controls
Zoning restrictions