General dividend discount models are relatively easy to apply to preferred shares. In its simplest form, preferred stock is a form of equity (generally, non-voting) that has priority over common stock in the receipt of dividends and on the issuer’s assets in the event of a company’s liquidation. It may have a stated maturity date at…
If the issuing company is assumed to be a going concern, the intrinsic value of a share is the present value of expected future dividends. If a constant required rate of return is also assumed, then the DDM expression for the intrinsic value of a share is: where At the shareholder level, cash received from…
Dividends: Background for the Dividend Discount Model Generally, there are two sources of return from investing in equities: A dividend is a distribution paid to shareholders based on the number of shares owned, and a cash dividend is a cash distribution made to a company’s shareholders. Cash dividends are typically paid out regularly at known intervals;…
Three major categories of equity valuation models are as follows:
By comparing estimates of value and market price, an analyst can arrive at one of three conclusions: The security is undervalued, overvalued, or fairly valued in the marketplace. In practice, the conclusion is not so straightforward. Analysts must cope with uncertainties related to model appropriateness and the correct value of inputs. An analyst’s final conclusion depends not only on…
Projections for long-term assets are based on cash flow statement and income statement projections, because net PP&E and intangible assets on the balance sheet primarily increase due to capital expenditures and decrease due to depreciation and amortisation expenses. Capital expenditures can be broken down into maintenance capital expenditures necessary to sustain the current business and…
Cost of Sales and Gross Margins Cost of sales (cost of goods sold, or COGS) is typically the single largest cost for companies that make and/or sell products. SG&A Expenses SG&A expenses are the other main type of operating costs. In contrast to cost of sales, SG&A expenses often have a less direct relationship with…
Forecast Objects for Revenues Forecast objects for revenues are typically either top-down or bottom-up drivers, as discussed in the earlier module on company analysis. Common top-down forecast objects include “growth relative to GDP growth” and “market growth and market share.” Separating Recurring and Non-Recurring Revenue or Revenue Growth Forecast Approaches for Revenues
What to Forecast? Analysts may focus on different forecast objects related to issuers’ financial statements. Below are four common forecast objects. Focus on Objects That Are Regularly Disclosed Information that is not disclosed regularly (such as the size of a market from a third-party consultancy’s report) is suitable for informing forecasts but can be problematic for direct use because forecasts…
All companies have a competitive strategy, whether intentional or not. An intentional strategy results from company-wide planning, performance measurement, and feedback loops to sharpen the strategy. An unintentional strategy results from various teams within a firm pursuing their own incentives, doing whatever they did in prior years, or following industry or professional norms. An unintentional…