In this course, we will discuss fundamental principles of trading off risk and return, portfolio optimization, and security pricing. We will study and use risk-return models such as the Capital Asset Pricing Model (CAPM) and multi-factor models to evaluate the performance of various securities and portfolios. Specifically, we will learn how to interpret and estimate regressions that provide us with both a benchmark to use for a security given its risk (determined by its beta), as well as a risk-adjusted measure of the security’s performance (measured by its alpha). Building upon this framework, market efficiency and its implications for patterns in stock returns and the asset-management industry will be discussed. Finally, the course will conclude by connecting investment finance with corporate finance by examining firm valuation techniques such as the use of market multiples and discounted cash flow analysis. The course emphasizes real-world examples and applications in Excel throughout. This course is the first of two on Investments that I am offering online (“Investments II: Lessons and Applications for Investors” is the second course). The over-arching goals of this course are to build an understanding of the fundamentals of investment finance and provide an ability to implement key asset-pricing models and firm-valuation techniques in real-world situations. Specifically, upon successful completion of this course, you will be able to: • Explain the tradeoffs between risk and return • Form a portfolio of securities and calculate the expected return and standard deviation of that portfolio • Understand the real-world implications of the Separation Theorem of investments • Use the Capital Asset Pricing Model (CAPM) and 3-Factor Model to evaluate the performance of an asset (like stocks) through regression analysis • Estimate and interpret the ALPHA (α) and BETA (β) of a security, two statistics commonly reported on financial websites • Describe what is meant by market efficiency and what it implies for patterns in stock returns and for the asset-management industry • Understand market multiples and income approaches to valuing a firm and its stock, as well as the sensitivity of each approach to assumptions made • Conduct specific examples of a market multiples valuation and a discounted cash flow valuation This course was previously entitled “Financial Evaluation and Strategy: Investments” and was part of a previous specialization entitled "Improving Business and Finances Operations", which is now closed to new learner enrollment. “Financial Evaluation and Strategy: Investments” received an average rating of 4.8 out of 5 based on 199 reviews over the period August 2015 through August 2016. You can view a detailed summary of the ratings and reviews for this course in the Course Overview section. This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.
Objectives and Overview
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Из курса от партнера University of Illinois at Urbana-Champaign
Investments I: Fundamentals of Performance Evaluation
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University of Illinois at Urbana-Champaign
271 оценки
Курс 3 из 7 — Specialization Financial Management
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Module 4: Investment Finance and Corporate Finance: Firm Valuation
In Module 4, we will learn about the two key approaches to valuing a company or stock: market multiples and discounted cash flow. We will learn how to value perpetuities and will discuss how caution should be exercised in terms of projecting both the growth in long-term cash flows and the riskiness of those cash flows – two key components of the perpetuity formula. Finally, to gain experience with the market multiples approach, we will estimate a value of Google at the time of its initial public offering (IPO) back in 2004 using market data on Yahoo! as a comparable firm.
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Scott WeisbennerWilliam G. Karnes Professor of Finance
Department of Finance, College of Business
[ Music ]
>> Hi. I'm Professor Scott Weisbenner, Professor of Finance
at the University of Illinois.
And this is module four of my investments course.
And I hope for this module you like roller coasters here.
This roller coaster may be a little painful
if you've been an investor, particularly in the NASDAQ
over the last 15 years, you know, kind of at the top
of the roller coaster.
As we're heading down, the summer of 2000,
we maybe did realize, you know, how far down we were going.
It takes another 15 years to get to the spring and summer of 2015
for the NASDAQ to get to that same level of 5,000.
Here we have just, you know,
kind of a little screen showing the NASDAQ change in price
from March of 2009 to December of 2001 in blue.
And you see this, you know, kind of fairly dramatic here,
60% decline in the NASDAQ index,
while treasuries aren't changed very much.
So clearly change and expectation
about future cash flows,
the growth of cash flows going forward fell big time.
That's why they call it a technology bubble crash
or popping.
So, you know, kind of big change and assumptions
about [inaudible] cash flows and cash flow growth,
big effect on valuation.
Another real world example here, looking at the S and P 500
in blue, so from, you know, January 2011 through May
of 2015, we see this, you know, almost 70% increase in the value
of the S and P 500 index.
At the same time, the yield
on 30 year treasuries have fallen almost 1.6
percentage points.
You know, are those related?
Kind of a simple, perpetuity value of firm valuation.
Say hey, one of the key components
of value is the future discount rate.
The discount rate falls a lot, 30 year treasuries,
10 year treasuries are falling out along terms
of their yields are falling.
That means cash flows in the future will be worth more
in today's terms, so the value of assets should go up.
S and P 500 is, you know, kind of a great example of that.
So when we're looking at the S and P 500, 2011 to May 2015,
the question is are we at the top of the roller coaster here
or are we, you know, kind of going
to continue upward, upward, and onward?
So you may kind of get the picture of theme here for,
you know, module four.
It's going to be all about, you know, firm and stock valuation.
And sometimes when you're looking at the value
of an individual firm, or you're looking at, you know,
kind of an index, like the S and P 500, or NASDAQ,
it may seem like valuation is a lot like a roller coaster.
The valuations, you know, individual stock,
the index on a whole seem to have moved around quite a bit.
You know, at least it seems that way over the last, you know,
15 or 20 years, but it's really kind of been, you know,
that way, you know, kind
of throughout the history of stock markets.
You have continually changing, you know,
kind of valuations of firms.
So at least a natural question, you know, what ultimately goes
into a firms, you know, kind of value?
How sensitive is the firm value to assumptions about, you know,
short term cash flow, long term projections and growth rates
at the cash flow, and the riskiness of the cash flow,
the discount rate, which we've, you know,
kind of developed during the first part
of the investments course.
OK? First part of the course, early on we are talking
about coming up with asset pricing models,
coming up with required returns
that securities should yield given its risk.
And in the capitalized outpricing model
that risk was determined by how sensitive is the performance
of that asset to the market as a whole.
In module four, we're going to focus on the level of prices
and value, not the return.
So the discount rates or acquired return for a stock
that we developed earlier in the course.
We developed the tools to calculate that required return.
That will be a component
of the total firm value or the stock price.
That will be the discount rate that goes
into converting future cash flows
from the firm, into a value today.
We'll also look and see can we glean any insights about,
you know, what the value of our share
from should be given how other comparable
or similar firms are currently valued in the stock market.
So, first returns now prices, you know, here's Apple.
I think we showed this stock screen from finance
that Yahoo earlier in the course.
When we're looking at the beta, that's going in to determining,
you know, what's the required return investors have
for Apple's stock.
What's the potential discount rate that Apple should use
to discount its future cash flows to get them in terms
of a value, dollar value today?
That went into getting the required return, the beta.
What we're interested in module four of the course is focusing
on well let's come up with like an estimate,
not just of what the required returns are going forward, or,
you know, kind of valuating the performance of firms
and securities in the past,
and seeing how they exceeded their benchmark,
what their benchmark is.
Going forward, we're focused on, you know,
what should be the right level?
What should be the value of the company, the market cap?
What should be the price per share of the stock?
And when we're looking in terms of value, we see, you know,
kind of multiple type of valuation ratios reported,
and also a wide variety in the magnitude
of these valuation ratios across firms.
So for example, here looking at Microsoft.
Top line here on this, you know, kind of valuation, you know,
kind of chart here, you know,
provided by Morningstar is a price to earnings ratio.
The stock price divided by the earning per share,
or the total market cap divided by total earnings.
And you can see here this was taken, you know, May of 2015.
Microsoft's price earnings ratio, price divided by earnings
over the last year of about 20, similar to the S and P 500.
OK? Another valuation ratio here,
price to book, market to book.
So we talked about this would be kind
of an indicative, a growth or value.
In the investments world, you usually took about--
and talk about book to market.
The reciprocal of that is price to book.
So you can see here, Microsoft's price
to book ratio is 4.2, the S and P 500 2.8.
So Microsoft's kind of more in the category of growth stock.
But by this measure here,
the market value exceeding the book value by quite a bit
for Microsoft, more than the market as a whole.
Facebook, also, you know, kind of market value ratios,
or valuation ratios provided for Facebook as well.
Here you can see the difference in various types
of price earnings ratios.
So for example, currently again measured in, you know,
May of 2015, the price to earnings ratio for Facebook
when we measure earnings over the past year is 80.
Compared to the overall market, what-- its 19.
So why is Facebook's price to earnings ratio so much higher
than the market, almost a factor of four, what's going into that?
Well, kind of key is, for people to, you know,
kind of buy Facebook stock
at the current price it's trading at,
there's an embedded assumption that Facebook is going
to be growing much faster than the overall market.
If that's not the case, the stock price
for Facebook will drop dramatically.
That's reflected by that price of Facebook,
divided by last year's earnings of 80.
How about if we look at what's called a forward price
earnings ratio.
Well this is the price of Facebook,
not divided by earnings over the last year, but earnings expected
by analysts over the next year.
So here you can see the forward price earnings ratio is 32.5
as opposed to 80.
So that means that analysts except tremendous growth
in Facebook's earnings, to knock that price earnings ratio
from 80, when earnings are measured over last year,
to a price range ratio of 32.
When earnings are measured over the next year in the future,
there has to be a lot of growth in earnings to make that happen.
That's what analyst are expecting.
If you look at the S and P 500, they're, you know,
kind of the price earnings ratio on the future is 18.6 using,
you know, earnings expected next year compared
to the 19.4 using earnings over the last year.
So embedded in the S and P 500 valuation is only a small growth
in earnings.
Embedded in the Facebook valuation is a tremendous growth
and earnings.
So we'll also talk about this module on average,
is there persistence in growth rate?
So firms like Facebook on average, are they able
to deliver this high growth and earnings over long periods
of time, which is currently embedded in the value
of Facebook, this high growth.
Do firms achieve this on average?
Will be something that we talk about in the course.
So big differences in valuation ratios.
Why do firms have different valuation ratios in terms
of price earnings or price to book?
What's embedded in the price earnings?
You know, what's that telling us about growth?
Prospects expected by the market for the firm.
What's it telling us about how the market perceives riskiness,
a cash flow?
There's a lot we can learn by looking at price earnings
or ratio of funds, and comparing, you know,
the price earnings ratio across firms.
Also, when we're doing a market multiple evaluation analysis,
can we use evaluation ratio of one firm
to estimate the value of another?
So corporate finance and investments.
And that's really what, you know,
kind of this last module is linking.
It's linking, you know, kind of what we learned
in investments to value firms.
Now certainly when you do,
you'll look at the topic of firm valuation.
This is typically covered in more depth
in a corporate finance class then it would be
in an investments class.
So the investments course like this one provides guidance
in terms of coming up with hurdle rates, required returns
for firms based on, you know, for example estimates
from a CAPM model of the beta.
You know, using that in assumptions
about the equity market premium and treasury yields.
Go forward; you can come up with a hurdle rate or discount rate
to convert future cash flows of the firm in question
to a value today, and thus a stock price today.
And investments is giving us this, you know,
kind of discount rate component to go
into the cash flow valuation.
So, you know, even though firm valuation is typically covered
more in a corporate finance class,
I thought it would be useful to take our investments knowledge,
take a stab and some firm valuation techniques
in this investments class as well.
So what all do we plan to accomplish in module four?
Well in the last quarter of the investments course,
so let's make it count here.
So we've just, you know, kind of wrapping our objectives
and overview of the course.
Then, basics on perpetuities.
OK? So when you think of a stock, buying stock in a firm
or a firm, think that's an asset with a very long life.
So that would be, you know, suggests let's use a perpetuity
to value, you know, kind of the stocks.
Let's if we put in assumption about short term cash flows,
long term growth in the cash flow, the discount rate to use
to convert future cash flows into a value today,
you're willing to make all those assumptions,
plug them into a perpetuity formula.
That will give you the value of the underlying asset or stock.
So once we develop the perpetuity formula,
we'll do a simple application of that to recent changes in the S
and P 500 index from 2011 through May of 2015.
And we highlighted that a little bit earlier
on in this introduction to module four.
How much of the rise in value of the overall U.S. stock market
over the past few years, 2011 to 2015, can be explained
by just simply the reduction in U.S. treasuries, the reduction
in the discount rate component of the perpetuity formula.
Then, a primer on valuation, where we talk
about market multiple approaches
and income approaches to valuing a firm.
OK? Building on that, on kind of the income approach
to valuation, which requires assumptions
about the discount rate and growth rate.
I think it's useful to take a step back
and provide some lessons to give you a little caution
when making long-term forecasts
on discount rates and growth rates.
Keeping that in mind, then let's go through some actual concrete,
you know, kind of examples, applying our investments
and valuation and techniques.
First of which will be discounting cash flow valuation
example applied to pension plan liabilities.
You know, what's a big issue for state governments
like the state of Illinois?
For example, or California or for firms like,
you know, General Motors.
For example, is how to value these defined benefit promises.
How to value this stream of liabilities to come
up with a value in today's terms.
OK? Well take that, you know, kind of issue head on using kind
of the logic that we have developed in investments course
as to the determination on what's appropriate discount rate
to convert future liabilities into a present value cost today,
to get a sense of how big is this liability
for state governments and for firms that offer
to find benefit plan packages in the past.
Then moving on, using the market multiple technique.
This is when you use things like a price earnings ratio
or a market to book ratio.
Some ratio that has market data divided by accounting data.
You use the ratio like that of a firm, you know,
like Yahoo for example, to value yourself.
In the case I have, Google.
So we'll do a market multiple analyses valuing Google
at the time of their IPO, where it will use Yahoo
as our comparison firm.
So Google isn't publically traded yet.
It doesn't have any market data.
Let's use the market value ratios of Yahoo.
Yahoo and Google at the time of the IPO
in 2004, pretty similar firms.
So if we're willing to make the assumption
that Google should be valued the same way Yahoo is,
take Yahoo's market multiples, multiply them
by Google's accounting data, and it gives you estimates
of Google's market data and what price Google should have set
at the time of their IPO.
So that will be kind of a fun example to look at.
And then, assignment five, we'll provide you
with practice doing discounted cash flow valuations.
I'll have you pick among three firms,
Apple, Facebook and Google.
Pick one of the three to do evaluation, and see, you know,
how reasonable you think kind
of current price levels are for those firms.
I will kind of do one on my own.
I'll pick Microsoft and do evaluation of Microsoft as of,
you know, early July of 2015,
and see how the simple assumptions I make correspond
with the current market value.
Then finally as always, we, you know, kind of wrap
up with a module for review.
So for those who are taking the course for high engagement,
to get, you know, University of Illinois credit,
I'm going to provide even more practice
on market multiple valuation techniques,
discounted cash flow techniques.
When we do the case study,
evaluating this takeover target Interco.
This is one of my, you know, favorite case studies.
I teach it in investments class.
I teach it in corporate finance class.
Even if I was teaching Spanish literature I'd find some way
to get this Interco case study as part of the lesson plan.
It's really a great case because it allows you to kind
of dig deep and explore the sensitivity of the, you know,
the valuations of various assumptions.
Critique the reasonableness of the various assumptions
that go into the valuation.
And identify corporate action that may make the stock
and firm appear to be more valuable
in the eyes of investors.
And what's nice about this Interco case study is there was
ultimately a lawsuit involved Interco that enabled there
to be disclosure of all the valuations that were done
by the investment bank, Wasser, Stein and Perella
that Interco hired to do an evaluation for them.
Interco was subject to a takeover.
It haired Wasser, Stein and Perella
to do various valuations, to get a sense
of what a reasonable price is.
The great thing for us is we actually see what those
valuations were, and then we can reverse engineer
and see what assumptions were consistent with the valuations
that were given to Interco at the time of their takeover bid.
An Interco is a company conglomerate with, you know,
a very diverse brands like Ethan Allen furniture, Converse,
London Fog coats, so it's kind of a fun company to look at.
OK? Practical knowledge experiences
that you should take away from module four, how to conduct
and apply perpetuity valuations, and appreciate the sensitivity
of the value of an asset or security day--
today to small changes and discount rates or growth rates.
And then I'll have a direct application
of the simple perpetuity formula to get an understanding of S
and P 500 movements and value over 2011 to 2015.
We're going to learn the market multiple approach
and the discounted cash flow
or income approach to valuing a stock.
But when we do these valuations, we also want to be cognizant
of some of the, you know, kind of risks.
Where I should say, you know, some of the limits
in our longer term forecasting ability
for discount rates and growth rates.
So, you know, we know the formula
to do the discounted cash flow valuation.
Anyone can punch in the numbers and get an answer.
The question is how reasonable are the assumptions that go
into that final answer.
And that's really where most of the skill is,
is deciding what assumptions are reasonable or not.
Not, you know, kind of punching the numbers in
and getting the final calculation.
And then finally, specific examples of how
to conduct a market multiple valuation in terms
of valuing Google at the time of its IPO,
and a discounted cash flow valuation,
where I'll give you a choice
of valuing either Apple, Facebook or Google.
And then I'll do a valuation of Microsoft
that I'll share with you.
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