The equity part three topics will build the previous two sessions and discuss commonly used models for valuing stocks. There are a number of formulas covered, but none of them are terribly complex and many candidates will have likely seen at least a few of them before either in an academic or professional capacity. Flashcards […]
Equity Analysis Part 3
Free Cash Flow Valuation
FCFF vs. FCFE Definitions FCFF: Free Cash Flows to the Firm are available to both suppliers of equity and debt capital; return of these cash flows to stock and bond investors does not threaten the company’s existence as a going concern. WACC & FCFF: When performing a company valuation using discounted FCFFs, the discount rate […]
One, Two, and Three Stage FCF Calculations
Single Stage FCFE and International Valuation This approach is a variation on the Gordon Growth Method. Real cash flows, the real growth rate, and the real required rate of return will be applied to minimize potential distortion caused by inflation and other international differences. International Stock: V0 = (FCFE0 * (1 + growth rate real)) […]
Share Price Multiple Methods in Equity Valuation
Introduction Stock share price multiples often heavily factor into stock recommendations. Because of this key role that multiples play in equity analysis and investing, CFAI expects candidates to understand how a company’s fundamentals and its accounting choices influence its share price multiples. Two share price multiple methods in equity valuation are: the method of comparables, […]
Price to Earnings (P/E) Ratio (Leading P/E and Trailing P/E)
In general, a company’s P/E ratio is its price per share divided by earnings per share; however there are multiple versions of earnings (trailing twelve months, forecasted twelve months, etc.) and multiple ways to decompose the ratio for analysis purposes. P/E = Price per share / Earnings per share CFAI focuses on leading P/E and […]
Price to Book (P/B) Value Ratio and Equity Valuation
P/B = market price per share / book value per share Book Value per Share = Common Equity / Common Shares Outstanding Common Equity = Total Equity – Preferred Equity Positives of P/B Book value is usually positive. Many financial services companies trade close to their book values. Book value is less volatile than earnings. […]
Price to Sales (P/S) Ratio
P/S = Market Price per Share / Sales per Share P/S Positives Sales can be more difficult for management to manipulate than earnings or book value. While earnings can be negative, sales are never negative. Sales can be more consistent than earnings. P/S can be useful for analyzing companies with no earnings, are cyclical, or […]
Price to Cash Flow Ratios
Analysts may choose to value stocks based on price to cash flow ratios. The cash flow applied could be: Net Income plus Non-cash Charges (which is not correct); Cash Flow from Operations; Adjusted CFO; or Free Cash Flow to Equity. Positives of Cash Flow Ratios: Cash flows are more objective than earnings. When earnings are […]
Enterprise Value (EV) to EBITDA
Enterprise Value (EV) = the total market value (MV) of the firm. EV = MV of debt + MV preferred equity + MV common equity – Cash and investments Cash and investments are netted out because these items reduce the net cost of purchasing the company. Enterprise value is a commonly used valuation perspective in […]
Dividend Yield for Valuing Equity
A classic metric for valuing a stock. Dividend Yield = Annual Dividend per Share / Price per Share Trailing Dividend Yield = (Recently quarterly dividend per share × 4) / Price per share Leading Dividend Yield: Calculated in the same manner, but forecasted future year dividend payments would be used. Dividend Yield positives: Payments are […]