Beruflich Dokumente
Kultur Dokumente
to accompany
Chapter 19
Version 1.2
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Chapter 19
Industry Analysis
Questions to be answered:
• Is there a difference between the returns for
alternative industries during specific time periods?
What is the implication of these results?
• Is there consistency in the returns for individual
industries over time? What do these results imply
regarding industry analysis?
peak
trough
Consumer
Consumer peak Staples Excel
Durables
Excel
Capital
trough Goods Excel
Financial
Stocks Excel
k−g
to D0(1+g)
k = the required rate of return on the equity for industry i
g = the expected long-run growth rate of earnings and
dividend
Copyright forbyindustry
© 2000 i All rights reserved
Harcourt, Inc.
Estimating the Required Rate of Return
• Influenced by the risk-free rate
• Expected inflation rate
• Risk premium for the industry versus the market
– business risk (BR)
– financial risk (FR)
– liquidity risk (LR)
– exchange rate risk (ERR)
– country political risk (CR)
• Or compare systematic risk (beta) for the industry to
the market beta of 1.0
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Estimating the Expected Growth Rate
• Earnings and dividend growth are
determined by the retention rate and the
return on equity
– Earnings retention rate of industry compared
to the overall market
– Return on equity is a function of
• the net profit margin
• total asset turnover
• a measure of financial leverage
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Industry Valuation Using the Free Cash
Flow to Equity (FCFE) Model
+ Net income
- Capital expenditures
- ∆ in working capital
- Principal debt repayments
+ New debt issues
Estimates: FCFE1
V=
k−g
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Relative Valuation Ratio Techniques
• Price-earnings ratios (P/E)
• Price-to-book value ratios (P/BV)
• Price-to-cash flow ratios (P/CF)
• Price-to-sales ratios (P/S)
• Pioneering development
• Rapidly accelerating industry growth
• Mature industry growth
• Stabilization and market maturity
• Deceleration of growth and decline