本学期资料 财务报表 Chpter Notes Chp006

1、Accrual Accounting and Valuation: Pricing Earnings,Chapter 6,6-2,Accrual Accounting at Valuation: Pricing Earnings,Chapter 5 showed how to price book values in the balance sheet and calculate intrinsic price-to-book ratios.,Chapter 7 shows how the valuation approaches in Chapters 5 and 6 are applied

2、 in active investing.,This chapter shows how to price earnings in the income statement and calculate intrinsic price-earnings ratio,The web page has more applications of the techniques in this chapter,Link to previous chapter,This Chapter,Link to next chapter,Link to web page,How are price-earnings

3、ratios determined?,What is a PEG ratio?,How do valuation methods protect the investor from paying too much for earnings growth?,How is the firm valued from forecasts of earnings growth? When should an investor not pay for growth?,6-3,What You Will Learn From This Chapter,What a P/E ratio means What

4、“abnormal earnings growth” is How forecasting abnormal earnings growth yields the intrinsic P/E ratio What is meant by a normal P/E ratio The difference between ex-dividend earnings growth and cum-dividend earnings growth The difference between a Case 1 and Case 2 abnormal earnings growth valuation

5、How abnormal earnings growth valuation protects the investor from paying too much for earnings growth The advantages and disadvantages of using an abnormal earnings growth valuation and how the valuation compares with residual earnings valuation That abnormal earnings growth is equal to the change i

6、n residual earnings How abnormal earnings growth valuation protects the investor from paying for growth What a PEG ratio is,6-4,The Big Picture for This Chapter,To price earnings, one thinks of earnings growth: More growth, higher P/E But: Beware of paying for growth Only pay for growth that adds va

7、lue Growth is risky: Beware of paying for risky growth Abnormal earnings growth is the metric that protects from paying too much for growth,6-5,The Concept Behind the P/E Ratio,Price in numerator of P/E is based on expected future earnings Earnings in denominator is current (or forward) earnings P/E

8、 is thus based on expected growth in earnings: for trailing P/E, growth from current earnings onwards for forward P/E, growth from one-year-ahead earnings onwards But growth is risky, so the P/E ratio also involves a discount for risk expected earning growth increases the P/E ratio risk reduces the

9、P/E ratio,6-6,Beware of Paying Too Much for Earnings Growth,Investment creates growth but does not necessarily add value Earnings growth can be created by the accounting,We need a valuation method that protects us from paying too much for earnings growth,6-7,Reminder: Residual Earnings Valuation Pro

10、tects You From Paying Too Much For Earnings,Earnings from new investment is charged with the required return on investment Residual earnings before new investment: 10% hurdle rate RE = 12 (0.10 x 100) = 2 (ROCE = 12%) Residual earnings after new investment of $20 million earning at 10% RE = 14 (0.10

11、 x 120) = 2 No value added from new investment Creating earnings by accounting methods increases residual earnings but reduces book value. The net effect is zero. See Chapter 5. A P/E model must also protect you from paying too much for earnings growth.,6-8,P/B Valuation: Nike, Inc. (from Ch. 5),6-9

12、,From P/B Valuation to P/E Valuation,The residual earnings pro forma for Nike, Inc:,6-10,Change in Residual Earnings and Abnormal Earnings Growth,Equivalent valuations: V = Book Value + PV of Residual Earnings = Capitalized forward earnings + PV of Changes in Residual Earnings Equivalent measures: C

13、hange in Residual Earnings = Abnormal Earnings Growth Abnormal Earnings Growth (AEG) is the growth in earnings over the required growth,6-11,The Prototype Savings Account,6-12,The Trailing P/E and Forward P/E,6-13,Cum-dividend Earnings,Cum-dividend earnings is earnings with the prior years dividend

14、reinvested: For the full-payout account: Earnings for 2014 $5.00 Earnings from reinvesting prior years dividend 0.25 Cum-dividend earnings $5.25 For zero-payout account: Earnings for 2014 $5.00 Earnings from reinvesting prior years dividend 0.00 Cum-dividend earnings $5.25 The two savings accounts h

15、ave the same cum-dividend earnings!,6-14,Normal Earnings,Normal Earnings is earnings growing at the required rate of return:,= 1.05 x 5.00 = 5.25,6-15,Abnormal Earnings Growth (AEG),Abnormal Earnings Growth is growth over normal earnings growth (in dollars): AEG = Cum-dividend earnings Normal earnin

16、gs For the Savings account:,6-16,Lessons from the Savings Account,1. An asset is worth capitalized forward earnings if abnormal earnings growth is expected to be zero. 2. An asset has a normal P/E ratio if abnormal earnings growth is expected to be zero. 3. Earnings comes from two sources: earnings

17、from the asset earnings from reinvesting dividends 4. Dividends do not affect cum-dividend earnings. 5. Dividend payout does not affect value.,6-17,An Anchoring Principle,If one forecasts that cum-dividend earnings will grow at a rate equal to the required rate of return, the assets value must be eq

18、ual to its earnings capitalized Or, equivalently: If one forecasts that abnormal earnings growth will be zero, the assets value must be equal to its earnings capitalized,6-18,A Bad P/E Model,Does not work for a savings account!,6-19,A Model of the Forward P/E,Value of savings account = Capitalized f

19、orward earnings + Extra value Extra value = 0 Extra value is added if abnormal earnings growth is forecasted The model:,Value of equity = Capitalized forward earnings + Extra value for abnormal earnings growth,The intrinsic P/E,is given by dividing through by Earn1,6-20,Measuring Abnormal Earnings G

20、rowth for Equities: Dell and Nike, 2010,Abnormal earnings growtht (AEGt) = Cum-dividend earnt - Normal earnt = Earnt +(E 1) dt-1 EEarnt-1 Dell: Required return = 9% Eps 2009 = $1.25 Nike: Required return = 9% Eps 2009 = $3.07,6-21,Cum-dividend Earnings Growth Rate,Cum-dividend earnings growth rate (

21、plus one): Note: This is not,6-22,Alternative Calculation of AEG,Abnormal earnings growtht = Gt E x Earningst-1 where Gt = Cum-dividend earnings growth rate (plus one) For Nike: G2010 = 4.018/3.07 = 1.3088 (a 30.88% growth rate) AEG2010 = 1.3088 1.09 x 3.07 = $0.672,6-23,Steps for Applying the Model

22、,Forecast earnings and dividends up to a forecast horizon. Calculate AEG after the forward year from the forecasts of earnings and dividends. Discount the AEG to present value at the end of the forward year. Calculate a continuing value at the forecast horizon. Discount the continuing value to prese

23、nt value at the end of the forward year. Add 3, 5, and forward earnings Capitalize this total at the required rate of return.,6-24,Applying the Model,6-25,Applying the Model: A Simple Example and a Simple Model,Forecast for a firm with expected earnings growth of 3 percent per year (in dollars). Req

24、uired return is 10% per year.,Residual earnings valuation:,AEG valuation:,6-26,A Case 1 Valuation: General Electric,Required return is 10% In this case, abnormal earnings growth is expected to be zero after 2004,Same as residual earnings valuation,6-27,A Case 2 Valuation: Nike, Inc.,Required return

25、is 9% In this case, abnormal earnings growth is expected to grow at a 4.5 percent rate after 2012,Same as residual earnings valuation,6-28,Converting Analysts Forecasts to a Valuation: Google Inc., 2010,Price in early 2011 = $624 Required return = 11% Consensus eps forecasts: 2011$33.83 2012$39.47 5-year growth rate forecasted = 17.4%,6-29,Protection From Earnings Created by Accounting: A Restructuring Charge,6-30,Abnormal Earnings Growth Analysis,6-31,The Fed Model,If Earnings Yield is less than 10-year treasury note yield, stocks are overpriced In Greenspan 1