Comments on: Equity Valuation Class: Approaches to Valuation

By: shailender

shailender — Tue, 09 Aug 2011 10:27:47 +0000

sir, i need to join the study group of valuation of stocks.

i am too keen to enter that group

please allow me to join the group

By: Nishant

Nishant — Sat, 01 Jan 2011 09:33:58 +0000

i would like to join the study group. kindly advise me how to do it. also i would like to recieve the files and exercises.

kindly advise me about the process
thanks

By: Ranjit Vadakkan

Ranjit Vadakkan — Tue, 29 Jun 2010 01:09:58 +0000

I’m 3 years too late, but here’s my take on Max’s comment -

Use the bottom-up approach to determine a firm’s beta. Find comparable firms and note down their betas and Debt-Equity Ratios. Compute the average beta for the sector and the average D-E ratio. Then find the unlevered beta of the sector using the average (levered) beta and the average D-E ratio. Finally lever this unlevered beta using the firm’s own D-E ratio.
Once you get the beta, find the COE using the CAPM approach. Cost of Debt (COD) can be approximated using the interest coverage ratio of the firm or by looking at recent bond issues. COE and COD combined give you the Cost of Capital (COC). COC is the discount factor used when discounting the value of future cash flows.

So to summarize, beta determines COE, COE and COD determine COE and COE determines value. Obviously growth and ROE are also important factors.

By: Justin

Justin — Mon, 07 May 2007 03:14:41 +0000

In regard to your question about the implicit assumptions… If you use relative valuation, you’re not required to figure out the growth rate or discount rate. It basically ties into the idea that the entire sector can be overvalued. The company you’re looking at may seem relatively undervalued, but you might be assuming a growth rate of 80% without realizing it by simply comparing it to the other similar companies. If you backed the number out and realized what you were assuming the growth rate at, you might second guess using the relative valuation method.

I think that’s what he meant, but that’s just my opinion.

By: jamie

jamie — Sat, 05 May 2007 15:12:05 +0000

Hey I’m going through these webcasts, they’re really informative. I’m also doing the weekly challenges that the Prof hands out with the lectures. I’ve done most of the 1st week apart from section e).
So I peeked at the answers!

But I can’t for the life of me still figure out how he comes up with the value of the firm when it has a 3% growth rate…

For example, how does he calculate the WACC/cost of capital at 10.6%?
it all seems really circuitous.

I can get the equity value from using the FCFE model and then using to figure out the inputs that go into the FCFF model,including the WACC, that would match the two up but that feels a little bit like cheating!

By: Equity Valuation Class: Riskfree Rate and Risk Premiums - Fat Pitch Financials

Equity Valuation Class: Riskfree Rate and Risk Premiums - Fat Pitch Financials — Fri, 04 May 2007 03:41:36 +0000

[...] for all equities and then adjust my margin of safety to address company specific risk. Max left a comment in the previous lesson that also questions estimating cost of capital using betas and country risk [...]

By: George

George — Thu, 03 May 2007 03:28:53 +0000

Sibusiso,
I’m glad you found this discussion useful.

Max,
You make some great points to keep in mind while listening to classes 3-5. I’m going to watch these videos in order to better understand the weaknesses of CAPM.

By: Sibusiso

Sibusiso — Wed, 02 May 2007 08:56:35 +0000

This is perfect and straight to the point, because I had a problem with understanding the relative valuation.

By: Max

Max — Sun, 29 Apr 2007 22:54:00 +0000

If you want to watch these videos from Damodaran, I would suggest skipping classes 3-5. No offense to Damodaran, but most of what he says in these is BS. I watched some of class 3, and it is mostly (other than the very beginning) useless information about estimating cost of capital using betas and country risk premiums. If you DO watch these, you’ll know exactly how Warren Buffett and others can make so much money without their strategies being closely followed.

Take for example near the middle of Session 3, where Damodaran talks about how the Price/Book (which can be seen as Price/Value) of a stock affects its beta. According to this reasoning, and Damodaran’s calculation of “Value” through a DCF model, he is saying that: Price/Value determines Beta, Beta determines Cost of Capital, and Cost of Capital determines Value. This just doesn’t make any sense, as stated many times by Warren Buffett. “To a man with a hammer, everything looks like a nail.”