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Study Session 9: Equity Valuation: Valuation Concepts

Industry and company analysis

Hi,

Do we really need to do the BB examples for industry and company analysis? While the chapter seems fairly easy, the BBs are crazy lengthy and time consuming! 

What do you guys suggest? 

GGM model

If dividend declines at a constant rate indefinitely, is Gordon growth model still valid?

P/E ratio

P=D/(r-g)

Leading P/E=(payout ratio)/(r-g)

Therefore, as payout ratio increases, P/E increases.

However, g=ROE*(1- payout ratio)

As payout ratio increases, g decreases, then P/E decreases.

So, if payout ratio increases, whether P/E increases or decreases?

Inflation risk

Why nearly all stocks have negative exposure to unexpected change in the inflation rate, as their returns decline with positive surprises in inflation?

Return Concepts

if the historical data displays survivorship bias, the historical risk premium estimate should be adjusted downward, not upward…

Can somebody explain the logic here? I thought survivorship bias means only the good performing funds are taken into account hence the risk premium is too low (compared to what it would be if all funds were considered) as it only considers the good performing funds… so to adjust the risk premium should be adjusted higher..

high risk = high risk premium… please correct me if i am wrong.

equity valuation

can i use different risk free rate for every year in my equity valuation ???

Like for Y1 Rf=4% Y2 Rf=3% and so on …….

Calculating EV/EBITDA

Need a little help on this EV/EBITDA calculation for Chesapeake Energy.  Not sure if I’m doing this right. 

Using yesterday’s closing price and current outstanding shares, I got a diluted equity value of $6.132B. Then, I used the most recent 10-Q to calculate the EV. Does this look right? I appreciate any help.

Diluted Equity Value:                 6,131,864,900

Less Cash & Cash Equiv:               (4,000,000)

Less: Net Value of Hedges:            121,000,000

Plus: Debt                                  9,678,000,000

Comparing PEs across countries, across sectors

I work with someone who is adamant on comparing the PE values of different countries benchmark indexes, and using that to say that one country’s equity market is undervalued etc.  [The only context i am used to using PE is stock vs its sector, and even then it can be hard to define a comparator group.]

This seems like total garbage to me, even the data is distorted by negative earnings, but what are the key reasons why this analysis is meaningless in practice?

Brainstorm

equity

Explain the implications of Fama French models’s  factors - size, Value and market factors in determining the characteristics of a company