Chapter 18 equity valuation models multiple choice questions. Basis for approach where cft is the cash flow in period t, r is the discount rate appropriate given the riskiness of the cash flow and t is the life of the asset. This concept is simple in theory but complicated in practice as it is difficult to obtain the market value of the assets and liabilities for even a small company. Equity valuation models free download as powerpoint presentation. Models of equity valuation valuation models use comparables look at the relationship between price and various determinants of value for similar firms the internet provides a convenient way to access firm data. Up to the 1990s, the premier model, in both text books and practice, was the discounted cash flow model. Ppt equity valuation models powerpoint presentation, free. Alex shapiro 1 lecture notes 11 equity valuation i. Valuation of the total entity and its components 22. This approach looks at the maximum price an acquirer can pay for a business while still hitting some target. The capital asset pricing model and factor models are also used. His model viewed the brand equity as a combination of brand awareness, brand loyalty and brand associations, which then combines with each other to finally offer the value provided by a product or service. Lastly, relative valuation methods are a price to earnings ratios.
Dividend discount model ddm or earnings discount model edm or discounted. Another valuation method for a company that is a going concern is called the ability to pay analysis. Consequently, we view it as a subset of these approaches. Chapter 7 stocks and stock valuation characteristics of common stock the market price vs. David aaker defines brand equity as a set of assets and liabilities linked to a brand that add value to or subtract value from the product or service under that brand. Valuation methods three main approaches to value a business. In fact, many research agencies have developed their own brand equity models that are executed in partnership with enduser researchers. This course provides an overview of valuation and the principal methods used to value firms or any cash flow producing asset. The comparable model is a relative valuation approach. This private equity returns template is a fully working leveraged buyout lbo transaction model highlighting the returns for the private equity company acquiring the target company. In fact they will generally use more than one model.
Best practices and pitfalls a grant thornton llp 2015 survey. As per this model, dividends will grow at the same rate g into the indefinite future and the discount rate k is greater than growth rate. Constant growth model gordons share valuation model. Equity valuation methods can be broadly classified into balance sheet methods, discounted cash flow methods, and relative valuation methods.
Firms prefer these alternative approaches because they seem less. Equity valuation for analysts and investors introduces you to the financial statement analysis and modelbuilding methodology used by leading equity research firm argus research. The intrinsic value of an asset is determined by the cash flows that the asset is expected to generate over its life, keeping in mind the certainty of such cash flows. Modify this with your own assumptions and financial information to fit the needs of your transactions or scenarios. On the other hand, it ensures that companies whose fundamentals are weak witness a drop in their valuation. The following points highlight the top six pricing models used for the valuation of securities. Equity valuation or the valuation of any asset is an art. Asset valuation is the process of determining the fair market or present value of assets, using book values, absolute valuation models like discounted cash flow analysis, option pricing models or. It should tell you everything you need to know about taking or missing a quiz. Brand equity has been defined and measured by experts from both academia as well as forprofit companies. To ascertain the fair value of a companys equity, the process of equity. Apart from that, it is useful in comparing companies that doing a comparable company analysis. Basic types of models balance sheet models dividend discount models.
Distinguish between different types of bonds, such as zerocoupon, perpetual, discount, convertible, and junk bonds and apply. How is business valuation done there are dozens of valuation models, but only two valuation approaches. Using equity valuation multiple is the quickest way of valuing a company. Penman columbia business school, columbia university the last 20 years has seen a significant development in valuation models. Lastly, relative valuation methods are a price to earnings ratios jul 26, 2018 knowing the difference between lifo. As discussed, on a micro level, equity valuation is. I cannot promise you a painless and pleasurable exam experience but i can try to minimize the pain inflicted. Market based valuation market valuation or relative equity valuation models estimate a stocks value relative to another stock and relies on the use of. Dividend discount model earnings multiplier approach earnings price ratio. Relative valuation, commonly known as the comps comparables approach, is initially introduced, along with several metrics often used to compare competitors. Equity valuation model free download as powerpoint presentation. For aaker, brand management begins with building up a brand identity, which is one of a.
Balance sheet methods comprise of book value, liquidation value, and replacement value methods. The art and science of equity valuation therefore enables the modern economic system to efficiently allocate scare capital resources amongst various market participants. Another way to value a company is to add up the value of the assets it has and remove the value of the debts and obligations. Equity valuation free cash flow and other valuation models t his study session presents additional valuation methods for estimating a companys intrinsic value. These are the most common methods of valuation used in investment banking, equity research, private equity, corporate development, mergers. Download the excel files and use existing examples from finance professionals to take your analysis to the next level. Market value, intrinsic value and investment value.
Absolute valuation models derive an assets intrinsic value and generally take the form of discounted cash flow models. Equity valuation models can derive either absolute or relative values. Valuation templates download professional valuation. Learning outcomes 1 1introduction 2 2 the scope of equity valuation 3 2. Valuation methods guide to top 5 equity valuation models. This lesson is part 3 of 15 in the course equity valuation. Doc chapter 18 equity valuation models multiple choice. Valuation models powerpoint powerpoint presentation ppt. Valuation methods valuation by comparables priceearning ratios balance sheet models book value expected returns vs. Written by jim kelleher, the companys director of research, the book offers the tools for estimating individual equity cash value. Overiew with dcf illustration and appropriateness of models.
David aaker and kelvin lane keller developed the brand equity models. Equity valuation refers to the approach and methodology applied to determine the intrinsic value of the shareholders equity in a company. Valuation is at best, an informed guess or an informed opinion. Brand equity models and measurement insights association. Discounted cash flow methods include dividend discount models and free cash flow models. The free cash flow model, which takes available cash flows for distribution as the basis for valuation, is presented as an alternative to the dividend discount. Aaker brand equity model the brand equity model proposed. Valuation of bonds and equity university of scranton. It enables companies with sound business models to command a premium in the market. An introduction to stock valuation brian donovan, cbv.
Intrinsic value is the true value of a company based on its fundamentals such as its growth rate, management quality, strategic advantage and other tangible and intangible factors. Basis for all valuation approaches the use of valuation models in investment decisions i. This equity valuation method involves comparing the operating metrics and valuation models of public companies with that of target companies. Relative 1 based on methods of comparables involves using a price multiple to evaluate whether an asset is relatively fairly valued, undervalued or overvalued when compared to a benchmark value of the multiple. Scribd is the worlds largest social reading and publishing site. Valuation is not a perfect science and there is no single correct answer to what the value of a security ought to be. Valuing private equity morten sorensen neng wang jinqiang yang august 7, 20 abstract we develop a dynamic valuation model of private equity pe investments by solving the portfoliochoice problem for a riskaverse investor lp, who invests in a pe fund, managed by a general partner gp. Investors and stock analysts use a variety of valuation models to arrive at the fair value of stocks. Aaker brand equity model was developed by professor david aaker of the university of california. In fact they will generally use more than one model with a variety of assumptions and arrive at a range. For example, if a private equity firm needs to hit a hurdle rate of 30%.
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