The Venture Choice Procedure

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1. Top-down, three-stage approach. 2. Base up, stock valuation, stock picking methodology ... of monetary and industry impact on individual firms and stocks ...

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´╗┐The Investment Decision Process Determine the required rate of return Evaluate the speculation to figure out whether its market cost is predictable with your required rate of return Estimate the estimation of the security in view of its normal money streams and your required rate of return Compare this inherent esteem to the market cost to choose in the event that you need to get it

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Valuation Process Two methodologies 1. Beat down, three-stage approach 2. Base up, stock valuation, stock picking approach The distinction between the two methodologies is the apparent significance of monetary and industry impact on individual firms and stocks

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Top-Down, Three-Step Approach 1. General monetary impacts Decide how to dispense venture reserves among nations, and inside nations to bonds, stocks, and money 2. Industry impacts Determine which businesses will succeed and which enterprises will endure on a worldwide premise and inside nations 3. Organization investigation Determine which organizations in the chose businesses will thrive and which stocks are underestimated

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Theory of Valuation To change over this surge of profits to an esteem for the security, you should rebate this stream at your required rate of give back This requires appraisals of: The flood of expected returns, and The required rate of profit for the venture

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Approaches to the Valuation of Common Stock Two methodologies have created 1. Marked down income valuation Present estimation of some measure of income, including profits, working income, and free income 2. Relative valuation procedure Value evaluated in view of its value in respect to critical factors, for example, income, income, book esteem, or deals

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Why and When to Use the Discounted Cash Flow Valuation Approach The measure of income utilized Dividends Cost of value as the rebate rate Operating income Weighted Average Cost of Capital (WACC) Free income to value Cost of value Dependent on development rates and markdown rate

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Why and When to Use the Relative Valuation Techniques Provides data about how the market is right now esteeming stocks total market elective enterprises singular stocks inside ventures No direction with respect to whether valuations are proper best utilized when have tantamount elements total market is not at a valuation outrageous

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Discounted Cash-Flow Valuation Techniques Where: V j = estimation of stock j n = life of the advantage CF t = trade stream out period t k = the markdown rate that is equivalent to the financial specialist's required rate of return for resource j, which is controlled by the instability (hazard) of the stock's money streams

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Valuation Approaches and Specific Techniques Approaches to Equity Valuation Figure 13.2 Discounted Cash Flow Techniques Relative Valuation Techniques Price/Earnings Ratio (PE) Price/Cash stream proportion (P/CF) Price/Book Value Ratio (P/BV) Price/Sales Ratio (P/S) Present Value of Dividends (DDM) Present Value of Operating Cash Flow Present Value of Free Cash Flow

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The Dividend Discount Model (DDM) The estimation of a share of regular stock is the present estimation of every future profit Where: V j = estimation of basic stock j D t = profit amid era t k = required rate of profit for stock j

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The Dividend Discount Model (DDM) Infinite period show accept a steady development rate for assessing future profits This can be decreased to:

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The Dividend Discount Model (DDM) If the stock is not held for an endless period, a deal toward the end of year 2 would infer:

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The Dividend Discount Model (DDM) If the stock is not held for an interminable period, a deal toward the end of year 2 would suggest: Selling cost toward the end of year two is the estimation of all residual profit installments, which is just an augmentation of the first condition

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The OUMA Dividend Discount + Relative Value Model If the stock is not held for a boundless period, a deal toward the end of year 3 would infer: Selling cost toward the end of year three is the estimation of the stock in view of the Estimated Earnings times the standardized PE Ratio.

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Present Value of Operating Free Cash Flows Where: V j = estimation of firm j n = number of periods thought to be limitless OCF t = the organizations working free trade stream out period t WACC = firm j' s weighted normal cost of capital

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Relative Valuation Techniques Value can be controlled by contrasting with comparable stocks in view of relative proportions Relevant factors incorporate profit, income, book esteem, and deals The most prominent relative valuation procedure depends on cost to profit

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Earnings Multiplier Model This values the stock in view of expected yearly profit The value profit (P/E) proportion, or Earnings Multiplier

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Earnings Multiplier Model Thus, the P/E proportion is dictated by 1. Expected profit payout proportion 2. Required rate of profit for the stock ( k ) 3. Expected development rate of profits ( g )

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The Price-Cash Flow Ratio Companies can control income Cash-stream is less inclined to control Cash-stream is vital for essential valuation and in credit examination

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The Price-Cash Flow Ratio Companies can control income Cash-stream is less inclined to control Cash-stream is critical for principal valuation and in credit investigation Where: P/CF j = the value/income proportion for firm j P t = the cost of the stock in period t CF t+1 = expected money low per share for firm j

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The Price-Book Value Ratio Widely used to quantify bank values (most bank resources are fluid (securities and business advances) Fama and French study demonstrated reverse relationship between P/BV proportions and abundance return for a cross segment of stocks

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The Price-Book Value Ratio Where: P/BV j = the value/book esteem for firm j P t = the end of year stock cost for firm j BV t+ 1 = the evaluated end of year book esteem per share for firm j

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The Price-Sales Ratio Strong, steady development rate is a prerequisite of a development organization Sales is liable to less control than other monetary information

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The Price-Sales Ratio Where:

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The OUMA Dividend Discount + Relative Value Model If the stock is not held for an endless period, a deal toward the end of year 3 would suggest: Selling cost toward the end of year three is the estimation of the stock in view of the Estimated Earnings times the standardized PE Ratio (or utilize the P/S or P/BV products).

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The OUMA P/EBITDA + Relative Value Model If the stock is not held for an endless period, a deal toward the end of year 3 would infer:

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The OUMA Enterprise Value Relative Value Model If the stock is not held for a limitless period, a deal toward the end of year n would suggest:

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Choosing the best RV Model Compare the spreads amongst High and Low Multiples after some time Compare the contrasts amongst High and Low esteem appraises LESS VARIATION BETWEEN VALUE ESTIMATES INDICATES A MORE APPROPRIATE VALUATION MODEL.

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OUMA SUMMARY SENSITIVITY MODELS DETERMINE THE KEY VARIABLES LET THE SALES AND EBITDA MARGINS VARY. Give THE MULTIPLES A chance to differ. WHAT ARE THE APPROPRIATE HIGH AND LOW ESTIMATES OF VALUE?

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