Equity

IV_analyst - Market Price (Analyst Perceived Mispricing)

( IV_analyst - IV_Actual ) + ( IV_Actual - Market Price )

Valuation Error + Actual Mispricing

Single Period DDM V₀

( D₁ ÷ (1+r)¹ ) + ( P₁ ÷ (1+r)¹ )

( (D₁ + P₁) ÷ (1+r)¹ )

Two Period DDM V₀

( D₁ ÷ (1+r)¹ ) + ( (D₂ + P₂) ÷ (1+r)² )

Multiple Period DDM

∑ ( D_t ÷ (1+r)^t ) + ( P_n ÷ (1+r)ⁿ )

Gordon Growth Model V₀

( D₁ ÷ ( r - g) )

Implied Growth Rate g

r - (D₁ ÷ P₀)

Present value of Growth Opportunities (PVGO)

P₀ - (E₁ ÷ r)

V using H-Model

( D₀ (1 + g_L) ÷ (r - g_L) ) + ( D₀ × H (g_S - g_L) ÷ (r - g_L) )

H = ( no.of years ÷ 2 )

Retention Rate

( EPS − Dividends ) ÷ EPS

Sustainable Growth (g)

ROE × Retention Ratio

Fair Value Based on Stock Fundamentals V₀

EPS × P/E

ROE

Net Income ÷ Equity

DuPont ROE

( NI ÷ Sales ) × (Sales ÷ Assets) × (Assets ÷ Equity)

P₀/E₁ Justified Leading Price to Earnings

( D₁/E₁ ) ÷ (r - g)

Equity Risk Premium

Dividend Yield + Growth Rate - R_f

Value of Fixed Rate Perpetual Preferred Share V₀

(Par × Dividend Yield) ÷ Required Rate

Dupont Model Net Profit Margin

(NI/EBT) × (EBT/EBIT) × (EBIT/sales)

FCFE (provided Debt-to-asset Ratio)

NI - (1 - DR)[(FC_INV - Depreciation) + WC_INV]

Terminal Value_t

FCFE_t+1 / ( WACC - g )

CFO

NI + NCC -WC_INV

FCFE

net income + depreciation − capital expenditures − increase in working capital − principal repayments + new debt issues

FCFE derived from FCFF

FCFF – [interest expense] (1 – tax rate) + net borrowing

FCFE derived from CFO

CFO - FC_INV + Net Borrowing

FCFF primary equation

NI + NCC + INT (1-tax rate) - WC_Inv - FC_Inv

FCFF derived by EBIT

EBIT (1 – tax rate) + Dep – FC_Inv – WC_Inv

Cost of Debt

Interest expense/market value of debt

WACC

w_d × r_d × (1 – t) + w_e × r_e

Value of Equity

FCFE₁/(Cost of equity – growth rate)

P/E Ratio

Market Price / EPS

Lower is Cheaper

Earnings Per Share

Earnings / Shares Outstanding

Book Value Per Share

Equity / Shares Outstanding

P/B Ratio

Market Price / Book Value Per Share

Lower is Cheaper

P/S Ratio

Market Capitalization / Sales

Sales = Earnings / Net Margin

Market Capitalization = Market Price × Shares Outstanding

*Lower is Cheaper

Earnings Yield

Earnings / Market Capitalization

Higher is Cheaper

Dividend Yield

Dividend / Market Price

Higher is cheaper

Price / Cash Flow Ratio

Market capitalization/Cash Flow

Cash Flow = Net income + Depreciation + Amortization

Market capitalization = Market Price × Shares Outstanding

Justified P/B

(ROE - g) / (r -g)

Shares Outstanding

Dividends Paid / Dividends Per Share

PEG Ratio

P/E ÷ Earning Growth Rate

Trailing P₀/E₀ Ratio

[(1 – b)(1 + g)] / (r – g)

EBITDA

(net income + interest + taxes + depreciation / amortization)

EV (Enterprise Value)

(Market value of common stock + Market value of Debt + Market value of Preferred Stock – cash and investments)

Purchases

Closing PPE - Opening PPE + Depreciation + Disposals

Aggregate Accruals Ratio

( NI - CFO - CFI ) / Average Net Operating Assets

Average Net Operating Assets = ( CA - CL ) / 2

Lower PEG

More Attractive Valuation

Higher PEG

Less Attractive Valuation

P/E Ratio (Version 2)

Payout Ratio / (k - g)

growth (version 2)

Retention Rate × Profit Margin × Sales/book value of equity

Leading P/S

(profit margin × payout ratio) / (r − g)

Trailing P₀ / S₀ or Justified P₀ / S₀

[(E₀ / S₀)(1 – b)(1 + g)] / (r – g)

[Profit Margin × Payout Ratio × (1 + g)] / (r − g)

Profit Margin

EPS / SPS

Earning Per Share / Sales Per Share

Terminal Value

P/E × Earnings

Normalized EPS_t

Average ROE × BVPS_t-1

EVA (Economic Value Add)

NOPAT - $WACC

NOPAT (Net Operating Profit after tax)

EBIT(1 – t)

$WACC

Invested capital × WACC

Invested capital = Long Term Debt + Share Holders equity

Implied Growth Rate using BVPS

r - [ ( BVPS × ( ROE - r) ) / ( V₀ - BVPS ) ]

P/CF Ratio

( 1 + g ) / ( r - g)

Adjusted CFO

NI + NCC -WC_INV + Int(1-t)

Single Stage Residual Income Value V₀

B₀ + [( ROE - r ) / ( r - g ) ] × B₀

Multi Stage Residual Income Value V₀

B₀ + PV(high-growth RI) + PV(Continued RI)

Equity Capital Charge

Total Equity × Required Rate of Return

Residual Income

Net Income - Equity Capital Charge

Residual Income at time t( R_t )

EPS - ( r × BV_t-1)

Market Value Added (MVA)

Market Value of Company - Total Capital

Aggressive Accounting Decisions

Higher Book Values , Lower Future Earnings

Conservative Accounting Decisions

Lower Book Values , Higher Future Earnings

DLOC

1 − [ 1 / (1 + Control Premium) ]

Total Discount

1 − [(1 − DLOC)(1 − DLOM)]

Build-up Approach

R_f + ERP + IP + SP + CSP

IP = Industry Risk Premium

SP= Small-cap Stock premium

CSP = Company Specific Risk Premium

ERP = Equity Risk Premium with beta = 1

R_f = Risk Free Rate

Transaction-related valuation

venture capital financing, an IPO, a sale of the firm, bankruptcy, or performance-based managerial compensation

Compliance-related valuations

financial reporting and tax purposes

Litigation-related valuations

shareholder suits, damage claims, lost profits, or divorces

β_unlevered

β_public / [1 + (1-t) D/E ]

β_{private Company}

β_unlevered × [1 + (1-t) D/E ]