2012 CFA l2 workbook 2

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Study Session 10 Valuation Concepts 5

Other Value Concepts

Going Concern Value: Typically the relevant

intrinsic value for publicly traded companies;

assumes assets remain in place and continue to produce cash flow into the future via continuing operations

Liquidation Value: The value if the firm ceases to

operate, all assets are sold, and the firm is dissolved

Orderly Liquidation Value: Assumes adequate

time to realize liquidation value

02011 Kaplan, Inc

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Uses of Equity Valuation

1 Stock selection-our focus

2 Inferring inputs from the market vs history

3 Projecting worth of company actions

5 Planning and consulting-max slh value

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6 Communication with investors

7 Valuing private business

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Study Session 10 Valuation Concepts

Evaluating the Quality of Financial Statement Information is Important

Revenue Recognition and Gains

Early revenue recognition Misclassification of non-operating income

Expensesand Losses

Too little or too much reserves

= Inappropriate capitalization of expenses

Off-Balance-Sheet Financing - understate liabilities

Operating Cash Flow - may be artificially inflated

Absolute vs Relative Valuation

Absolute valuation models:

Intrinsic value based on fundarnental characteristics-EPS, asset turns and leverage, return on equity, growth (g)

(e.g., DDM, free cash flow, residual income)

Value derived from relative comparison to

PIE, PIB, PICF, PIS models

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8 Study Session 10 Valuation Concepts

Appropriate Valuation Approach

Consistent with characteristics of company

Understand the company and how its assets create value

Based on quality and availability of data DDM problematic when no dividends

PIE problematic with highly volatile earnings

Consistent with purpose of analysis

Free cash flow vs dividends for controlling interest

Wrap Up: Equity Valuation Process

Model suitability Quality of the inputs-financial statement analysis, footnotes

Absolute versus relative valuation

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Valuation Concepts

Seven Return Concepts

1 Holding Period Return -capital gains plus any cash flow stated as a percentage of the initial investment:

2 Realized Return-historical return based on

observed prices and cash flows

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3 Expected Return-return based on forecasts of a future price and cash flows

4 Required Return-the minimum return an

investor requires given the asset's risk

5 Return from Convergence-return

expectedlrealized as market price converges to intrinsic value

present value of an investment

7 Internal Rate of Return (IRR)-the rate that

equates the discounted cash flows to the current market determined price

frequently in CFA land (capital budgeting, YTM, cash flow yield, etc.)

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Equity Risk Premium (ERP)

Equity Risk Premium-additional return

above the risk-free rate investors require for holding (risky) equity securities

The risk-free rate should be equal to the investor's investment horizon

T-Bills for short horizons T-Bonds for longer holding periods

Equity Risk Premium (ERP)

Required Return for a Stock

The ERP can be used to determine the required return for an individual security given its level of systematic risk

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1 2 Study Session 10 Valuation Concepts

Strengths and Weaknesses of Approaches to Estimating the ERP

between broad market equity index and T-bill Strength-objective and simple

Weaknesses:

Assumes stationary of mean and variance

of returns over time Upwardly biased duetosurvivorshipbias Which risk-free rate to use?

Strengths and Weaknesses of

Estimating the ERP

2 Forward-Looking ERP-utilizes current

market conditions and expectations concerning economic and financial variables

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Forward-Looking ERP

2 Macroeconomic Model-use macroeconomic

and financial variables such as inflation, earnings growth, and so forth

Strength-robust results Weakness-used only with developed countries

Forward-Looking ERP

Where:

Y = dividend yield E(I) = Expected inflation PEG = PE growth due to market correction

g, = Real growth rate

3 Survey-consensus of experts

24

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1 4 Study Session 10 Valuatior~ Cor~cepts

CAPM: Single Factor Required Return on Equity Model

Capital Asset Pricing Model (CAPM)

Expected equity

Example: Rf = 4%, ERP = 3.9%, P = 0.8, then:

Factor sensitivity-asset's sensitivity to a factor Think: Beta (the one sensitivity in the CAPM) Factor risk premium-return driver

Think: ERP (the single factor in the CAPM)

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Various Required Return on

Equity Models

Pastor-Stambaugh Model-adds a liquidity factor

to the Fama-French Model

Factors not specified

BIRR version is closest to accepted factors:

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Beta Estimation: Public Firms

Public company betas: Estimated with

regression Regress the company's returns on the returns of the overall

' Rcornpany

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Beta drift: Observed tendency of a computed beta to migrate towards 1.0

Beta Estimation: Thinly Traded

and Nonpublic Firms

Four-step procedure (called a pure play)

1 Identify a publicly traded firm with similar

industry characteristics

2 Estimate the beta of the publicly traded firm using

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3 Unlever the beta Bunleve,d = [ I /( I +(DIE,,,,,,))]BE

4 Relever beta Bnonpublic = [ I +(DIE ronpu ,, bc)] Bunlevered

02011 Kaplan, Inc 1 DIE ratio of the nonpublic firm / 34

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Strengths and Weaknesses of the

Required Rate of Return Approaches

CAPM-simple, easy to compute, single

Required Return Calculations

Exchange rates-compute the required

return in the home currency and adjust it by

the forecast for the change in the exchange

rate

Emerging market premium-use a

developed market benchmark and add an

emerging market premium

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2 0 Study Sessiorl 10 Valuatiorl Corlcepts

Weighted-Average Cost of Capital

by capital suppliers (WACC):

value = FCFF, discount at WACC

B ' ~ ~ u i t ~ value = FCFE, discount at RE

Use FCFE when capital structure are not volatile Use FCFF with high debt levels, negative FCFE Equity value = firm value - MV of debt

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Study Session 10 Valuation Concepts 2 1

Return Concepts

Seven return concepts

Estimating the equity risk premium

CAPM, Fama-French, and related models

Beta estimation

WACC

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Industry and Company Analysis

in a Global Context

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Study Session 11 Industry and Company Analysis in a Global Context 25

Impact of Five Industry Forces

Consider effect of each force on long-term

profitability (ROE)

Your Job: Determine whether each force

makes the industry MORE or LESS attractive

Bad Forces = Low Profits

Ultimately these forces affect firm valuation

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2 6 Study Session 1 1 Industry and Company Analysis in a Global Context

Porter's Five Forces

2 Threat of substitutes

3 Bargaining power of buyers

4 Bargaining power of suppliers

Attractive industry?

Competitive Force #I : Threat of Entry

Kev Issue: Will new industry entrants add

capacity and compete away the value-added

component of price?

Factors

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Competitive Force #2:

Threat of Substitutes

Key lssue

Do alternative products put a ceiling on the

price buyers are willing to pay?

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28 Study Session 11 Industry and Company Analysis in a Global Context

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Study Session 1 1 l ndustry and Cornpany Analysis in a Global Context 2 9

Changes in Industry Structure

Forces do not remain static

Changes within and without the industry

Regulatory changes

lnnovation and technology

Change may be good (make an industry

attractive) or bad (make an industry

unattractive)

Increase in bargaining power of buyers,

suppliers, increase in threat of substitutes

and new entrants, and increase in rivalry all

reduce industry's profit potential

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30 Study Session 11 Industry and Company Ar~alysis in a Global Context

Strategies for Achieving Competitive Advantage

Individual firms can move entire industries to

improve long-term attractiveness:

Eliminate inefficiencies Improve supply chain or distribution Redistributing pricing power away from customers

Create barriers to entry by increasing fixed costs

Keys to the Exam

Competitive Strategy

Important reading!

Know the five industry forces

Be able to identify strength of forces and strategy employed in specific situations

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Study Session 11 11-~dustry a r ~ d Compar~y Analysis in a Global Context 33

Approach #I : lndustry Life Cycle

Pioneer: Acceptance of product uncertain Risky

phase; no profits or cash flow

Growth: Product established, sales growth and

margins above average

Mature: lndustry growth equals GDP growth

Superior growth comes from gaining increased

market share, cost reduction

Decline: Shifting tastes/technologies Demand and

margins fall; consolidation occurs, firms exit

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Approach #2: Business Cycle Reaction

1 Growth industry: Growing sales and high margins

2 Defensive industry: Demand for products

relatively independent of cycle; usually mature industry; beta < 1 (e.g., food and utilities)

3 Cyclical industry: Product demand follows cycle; beta > 1 (e.g., autos)

External Factors

Classify as threats or opportunities

Technology: Will technology innovate or be obsolete in mature phase?

FedEx and email Government: Regulations, taxes, subsidies Sugar industry

Social changes: Lifestyle (long-term) or fashion (short-term and less predictable)

Two-income families and day-care industry Casual Fridays and business attire industry

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Study Sessior~ 11 lr~dustry a r ~ d Company Analysis in a Global Context 35

External Factors

Classify as threats or opportunities

Demography: Very long term; easy to predict trend,

difficult to predict implications

Aging population and assisted-living industry

Foreign influences: Impact of foreign competitors

OPEC and the oil industry, textiles, and media

Industry Supply and Demand

Demand Analysis

Top-down approach

Macro forecast to derive industry forecast

Inputs: lndustry customers, submarkets, raw

materials, and costs

Supply Analysis

Long-term: Supply = demand

Short-term: Imbalances create opportunity

Inputs: Capacity utilization analysis, lead

time, natural disasters

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36 Study Session 1 1 lndustry and Company Analysis in a Global Context

Industry Pricing Practices

Four factors that affect pricing:

1 Product segmentation: Differentiation

2 lndustry concentration: High concentration may lead to coordinated pricing

3 Ease of entry: Ease of entry will keep prices low

4 Supply input price: Volatility of input cost will impact pricing strategylprofitability

Think: Five Competitive Forces

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Industry and Company

Analysis in a Global Context

38 Valuation in Emerging

Markets

Issue: Inflation and Cash Flows

Issue: Inflation overstates growth in emerging

markets

Analysis problems:

1 Inflation distorts the value of non-monetary

assets such as PP&E

2 Cash flow projections distorted since revenue

and expenses are affected differently by inflation

Example: Revenue vs depreciation

Key: Long-term forecasts become more difficult

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38 Study Session 1 1 Industry and Company Analysis in a Global Context

Valuation for Emerging Market Firms

Big Question: Real or nominal values?

Generally, value can be calculated as:

Real CFs discounted at real discount rate Nominal CFs discounted at nominal discount rate

Bad news: You should know how to do both

EM Overview: A Three Part Process

Part 1: Calculate FCF (real and nominal)

Part 2: Calculate discount rate (real and nominal) Part 3: Calculate firm value

Gordon growth model (GGM)

Real FCF discounted at real rate Nominal FCF discounted at nominal rate

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Study Session 1 1 Industry and Company Analysis in a Global Context 3 9

Real or Nominal Values?

Three Issues

lssue # I - Income taxes: Paid on inflation-

distorted nominal earnings Process:

1 Estimate nominal EBITDA

2 Estimate nominal tax expense

3 Calculate real tax expense using the

lssue #2 - Net working capital: Again,

distorted by inflation Process:

1 Estimate nominal NWC outflows

2 Calculate real NWC outflows using the

inflation index

Does NOT equal change in real NWC because ignores holding loss

31

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Real or Nominal Values?

Three Issues

Issue #3 - Capital expenditures:

Forecast capital expenditures, depreciation, and EBITDA on a real basis

Emerging Market Valuation Example

Calculate: Loafer's Inc value using the GGM: Inflation: 20% (so, inflation 1 -year index = 1.2) Real growth rate: 5%

Real required return: 10%

Next year's real EBITDA: $1,000

Average asset life = 5 years

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Study Session 11 Industry and Company Ar~alysis in a Global Context 41

Emerging Market Valuation Example

Cash flow metric:

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Tiêu đề	2012 CFA L2 Workbook 2
Trường học	YeaBook
Năm xuất bản	2012

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Số trang	577
Dung lượng	13,45 MB