Investment Planning Investment Planning Valuation of a Firm April 16, 2015 Vandana Srivastava

Valuation of a Firm based on economic factors, industry variables, an analysis of the financial statements and the outlook of the firm determines the long-run fundamental economic value of the firm’s common stock process determines if the stock is undervalued, overvalued or fairly-valued relative to its market price

Basic Valuation Models dividend valuation model ◦ based on dividends expected to be received during the future ◦ interprets value of a share of a stock as present value of an expected stream of future dividends earnings valuation model ◦ assumes earning to be the main source of income

Dividend Model: Constant Growth Model assumes that dividends will increase at a constant growth rate (less than the discount rate) forever. The valuation is given by the formula: cost of equity: shareholder's required rate of return on an equity investment; k = r f + β (r m – r f ) best suited for companies in the expansion or maturity life-cycle phase accuracy of the stock price depends on the inputs Where: Po is the share price at the present time Do is the most recent dividend (full year dividend) g is the sustainable dividend growth rate of the company k is the cost of equity of the company or required rate of return

Earnings Valuation Model: EPS take the present value of all future earnings to determine a value appropriate for companies not paying cash dividends presently and immediate future if estimated stock price > market price of the stock => stock is undervalued and vice-versa

Example: Combined Earnings and Dividend Model

a projected price level as stated by an investment analyst or advisor or a price that, if achieved, would result in an investor recognizing the best possible outcome for his or her investment better than “ratings” as: ◦ ratings are opinions of individuals / analyst which may not be applicable to every investor

Example: Apple (yahoo! finance)

Calculate Target Price Price x ((current P/E) / (forward P/E)) = future price (or price target) forward P/E is the measure of the price-to-earnings ratio (P/E) using forecasted earnings for the P/E calculation.

Topic of Discussion! principle of net neutrality: what is net neutrality? which companies / industry would be affected by it? will it have any impact on stock market? how?

Reference “Fundamentals of Investment Management” by Hirt and Block investopedia