Equity Valuation (Formulas)

Perceived mispricing

The value of a stock for infinite holding periods is:

The value of a stock using the Gordon growth model is:

• Dividends grow at a constant growth rate g.

• Discount rate r is constant and is greater than g.

• Dividends bear and understandable and consistent relationship with profits.

The present value of growth opportunities (PVGO),

• present value of the company with no growth component and

• present value of growth opportunities.

The value of a stock using the H-model is:

Earnings retention rate (b)

Simply the % of earnings retained after paying out dividends.

Also calculated as 1 - payout ratio

Dividend Payout Ratio

b = % of retained earnings after paying dividends

Sustainable growth rate

FCFF

FCFE

Normalized EPS

Historical average method: Normalized EPS is calculated as the average EPS over the most recent full cycle.

Average ROE method: Normalized EPS = average full cycle ROE * current BV per share

Forward P/E:

Trailing P/E:

Price to book value:

Price to sales:

Dividend yield:

Residual income

is defined as the earnings for a given period minus the opportunity cost of

equity holders. It can be calculated in two ways:

Equity Value add

EVA is a commercial implementation of the residual income concept.

Residual income model

According to the residual income model, the intrinsic value of equity is a sum of two

components:

• The current book value of equity

• The present value of expected future residual income

The fundamental determinants of residual income are:

• book value of equity

• return on equity

Expanded CAPM:

Build-up method:

DLOC (Discounts for lack of control)

DLOM (discount for lack of marketability)