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Industry Analysis
Why Do Industry Analysis The Business Cycle and Industry Sectors Structural Economic Changes and Alternative Industries Evaluating the Industry Life Cycle Analysis of Industry Competition Different Valuation Approaches
Chapter 13
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13-3
Exhibits 13.1
13-5
Exhibits 13.2
13-6
Although risk measures for different industries have shown substantial dispersion during a period of time, individual industries risk measures are stable over time
13-8
13-10
Rotation strategy is when one switches from one industry group to another over the course of a business cycle See Exhibit 13.3
13-11
Exhibit 13.3
13-12
Interest Rates
For example, financial and housing industries will be adversely affected by high interest rates
International Economics
Economic growth in world regions or specific countries benefits industries with a large presence in the areas
Consumer Sentiment
The performance of consumer cyclical industries will be affected by changes in consumer sentiment
13-13
Exhibit 13.4
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Exhibit 13.5
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D 1 = Pi k-g
where: Pi = the price of industry i at time t D1 = the expected dividend for industry i in period 1 equal 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 for industry i
13-21
Or compare systematic risk (beta) for the industry to the market beta of 1.0
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Industry Valuation Using the Free Cash Flow to Equity (FCFE) Model
FCFE is defined as follows: FCFE= Net income + Depreciation - Capital expenditures - D in working capital - Principal debt repayments + New debt issues
13-24
Industry Valuation Using the Free Cash Flow to Equity (FCFE) Model
The Constant Growth FCFE Model
FCFE 1 V = k-g
The Two-Stage Growth FCFE Model
The two-stage model is similar to the two-stage DDM model
IN the second stage, FCFE is assumed to grow at a constant rate, normally lower than that in the first stage period
13-25
Competitive strategy Competitive environment Industry operating profit margin Industry earnings estimate Industry earnings multiplier
Depreciation expense
Generally increasing time series Specific estimate technique using the depreciation expense/PPE ratio Subtract depreciation from operating profit margin to determine industrys net before interest and taxes
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Exhibit 13.25
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Exhibit 13.26
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Exhibit 13.27
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