财务分析与证券定价(英文)chapter20

财务分析与证券定价(英文)chapter20 财务分析与证券定价(英文)chapter20 Chapter 20 The Analysis of Equity Risk and the Cost of Capital Links What you will learn from this chapter The precise measures of the cost of capital are difficult to calculate What risk is How business investment can yield extreme (high and low) returns How diversification reduces risk Problems with using standard Capital Asset Pricing Model and other beta technologies The difference between fundamental risk and price risk The determinants of fundamental risk The determinants of price risk What you will learn from this chapter (cont1>.) How fundamental analysis protects against price risk How pro forma analysis can be adapted to prepare value-at-risk profiles How fundamentals help to measure predicted betas The Nature of Risk Value is determined by expected payoffs discounted for risk Risk is determined by the likelihood of getting payoffs that are different from the expected payoff Risk is characterized by the set of possible outcomes that an investor faces and the probabilities of these outcomes: a return distribution Models of the Distribution of Returns: The Normal Distribution Best and Worst Performers, 1996: Wall Street Journal Shareholder Scorecard The Actual Distribution of Annual Stock Returns -100% 100% -47% 13% 73% 2 sd -2 sd 0 sd Annual Return Probability Diversification and Risk: the Effect on Standard Deviation from Adding More Securities to a Portfolio The Normal Distribution for the S&P 500 Portfolio Mean annual return = 13% Standard deviation of returns = 20% The Actual Distribution of S&P 500 Portfolio Annual Returns, 1926-98 Number of Times Observed Source: Based on data from the Center for Research in Security Prices, University of Chicago The Problems with “Asset Pricing Models” Risk factors are hard to identify Risk premiums on risk factors are hard to measure Often assume normal distributions of return The CAPM is “Seductively Precise” Normally distributed stock returns are assumed The market risk premium is a big guess Is it 3?%, 4?%, 8%, or 9?%? Has the market risk premium declined in the 1990s? Betas are estimated with error Estimates of the cost of capital are made from market prices and assume that the market is efficient Fundamental Risk Risk is determined by a firm’s business activities and so is understood by analyzing those activities A basic distinction: operating and financing risk A Framework for Analysis of Fundamental Risk Risk is the chance of earning poor residual earnings Profitability Risk: The Chance of Getting Poor ROCE The Analysis of Fundamental Risk The Analysis of Operating Risk RNOA = PM x ATO The Drivers of Operating Risk PM Risk ATO Risk OLLEV Risk Expensive Risk OLLEV Risk The Analysis of Financing Risk The Drivers of the Financing Premium: Financial Leverage (FLEV) Risk Borrowing Cost Risk The Analysis of Growth Risk Sales Risk Sales risk is the primary business risk Compounding Risk Factors Produce Extreme Returns A drop in sales is compounded by PM risk, ATO risk, FLEV risk and NBC risk The effect of a drop in sales is magnified by expense risk The effect of a drop in sales is magnified by operating level risk The effect of a drop in sales is magnified by asset turnover risk The effect of a drop in sales is magnified by OLLEV risk The effect of a drop in sales is magnified by FLEV risk The effect of a drop in sales is magnified by borrowing cost risk Value-at-Risk Profiles Value-at-Risk Profiles are prepared using pro formas for different scenarios. The outcomes in these pro formas are determined by the risk factors Steps to prepare Value-at-Risk Profiles Identify economic factors that affect the risk drivers Identify risk protection mechanisms in place within the firm Identify the effect of economic factors on the fundamental risk drivers Prepare pro forma financial statements under alternative scenarios for the fundamental risk drivers in the future Calculate projected residual operating income for each scenario and, from these projections, calculate the set of values from the scenarios Value-at-Risk Profile: Firm A Value-at-Risk Profile: Firm B Value-at-Risk Profiles: Firm A and B Historical Betas Betas revert towards their average of 1.0 Investors are interested in the future beta over the period they hold the investment. High and low historical betas tend to move closer to 1.0 subsequently in time. A rough rule for forecasting future betas from historical betas: This adjustment pulls bets towards 1.0. Fundamental Betas: Forecasting Future Betas from Fundamentals Two steps: Estimate relationship between historical betas and fundamental attributes (say, FLEV and OLLEV, for example) in the cross section Use estimates of b0, b1, and b2 to predict future beta for a firm with the most recent measure of the fundamentals for that firm Some Fundamental Measure that have been Used to Predict Betas Earnings variability Cash flow variability Size Growth in earnings or sales Growth in assts P/E ratio P/B ratio Dividend yield Scenario Planning and Pro Forma Analysis Pro forma analysis can be used to model outcomes for different planning scenarios. Investigate, for example, Adaptation Options Growth Options Strategic Risk Management Options Different future paths can be articulated with pro forma analysis and the value of the path calculated. Price Risk and Fundamental Risk Fundamental Risk is the risk of value not being realized because of fundamental factors that affect the firms’ activities Price Risk is the risk of value not being realized in prices because of factors other than fundamentals Price Risk Market Inefficiency Risk The market price may not reflect the “fundamental value” Scenario A risk Scenario B risk Fundamental analysis reduces Scenario A risk, but Scenario B risk can still affect a diligent fundamental investor Liquidity Risk Liquidity Risk is the risk of not finding a buyer or seller at the fundamental price Liquidity discounts Mechanisms to reduce liquidity risk Brokers Market makers Investment banks (“deal makers”) The fees of these specialists are the costs of reducing the liquidity discount Inferring Cost of Capital from Market Prices Given an estimate of growth (g), the cost of capital can be estimated from prices and forecasts of earnings Relative Value Analysis: Evaluation firms within a Risk Class Risk value ratios for firms in same risk class: A relative value ratio of 1.0 implies no arbitrage. Perceived Risk Building in a Margin of Safety Use a high discount rate in evaluating a BUY; use a low discount rate in evaluating a SELL Be conservative (for a BUY) or optimistic (for a SELL) in forecasting The Analyst’s Checklist