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Study Session 9: Equity Valuation: Valuation Concepts

Equity Valuation Methods and Inferences

If all the methods of equity valuation yield varying results,

(1) how must I come to a conclusion of what value an equity security holds?

(2) and on what basis would I have to prefer one valuation method over another?

Equity Valuation Methods and Inferences

If all the methods of equity valuation yield varying results,

(1) how must I come to a conclusion of what value an equity security holds?

(2) and on what basis would I have to prefer one valuation method over another?

a quick question about the DDM

I have a quick question about the DDM dividend discount model.

Do we need to assume that the capital gain growth rate is the same as the dividend growth rate? and why ?

Equity: adding consensus growth rate to dividend yield

Came across a practice problem. The solution provided adds consensus growth rate to dividend yield to arrive returns…..

div yield=3%

consensus growth=5.9%

Ke=3%+5.9%=8.9%

why is it not 3%*(1+5.9%)

CAPM for stock traded in more than one market

I have been reading equity valuation recently and find out that the weakness of CAPM are low explanatory power and more than one required return if stock is traded in more than one market.

The question is do we have a better model that solve this problem or we just have to calculate more than on required return in practice.

thanks :)

Holding Period Return

In the CFAI text, it shows HPR with two formulas:

r = Dividend Yield + Price Appreciation, [(Div + Price1)/Price0] - 1

Then it restates that it could be thought of as

E(r) = required return + convergence of price to value, such that E(r) = r + [(V0-P0)/P0], where V0 is the intrinsic value

I understand the first formula, but the second formula is tripping me up as we’re adding the required return on top of the original HPR formula…

FCFE when paying back debt

Hey Guys,

Just hammering out small details and found some inconsistencies in my notes

FCFE in the year you pay back debt, is it higher or lower?

I feel like it would be lower in the year you pay back debt (due to negative net borrowing) and then increase in the years after, due to the fact that you have lower interest cost but what happens to my net borrowing? Is it now lower offsetting any of the saving from the lower interest payment?

Any help would be appreciated

Risk Free Rate for Multi Factor Models vs Build Up Models

Is my understanding correct?  Below is what I’m seeing on mocks.  I think knowing this concept will be good for a point or two on the exam.

Multi-Factor Models (have Betas): Use Short-Term Risk Free Rate

Build Up Models (No Betas): Use Long-term Risk Free Rate