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Fama French Factors and Valuation Methods

The document discusses several financial concepts and formulas: 1) The Fama French factors which are used in asset pricing models including the market factor, SMB, and HML. Other factors mentioned are UMD, CMA, and RMW. 2) Formulas for expected return, present value of equity, weighted average cost of capital, adjusted beta, implied price-to-earnings ratio, and price-earnings growth ratio. 3) Bond valuation formulas including present value of coupon payments and par value, annuity present value, holding period return, dollar duration, and weighted average term.

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VISHAL PATIL
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41 views1 page

Fama French Factors and Valuation Methods

The document discusses several financial concepts and formulas: 1) The Fama French factors which are used in asset pricing models including the market factor, SMB, and HML. Other factors mentioned are UMD, CMA, and RMW. 2) Formulas for expected return, present value of equity, weighted average cost of capital, adjusted beta, implied price-to-earnings ratio, and price-earnings growth ratio. 3) Bond valuation formulas including present value of coupon payments and par value, annuity present value, holding period return, dollar duration, and weighted average term.

Uploaded by

VISHAL PATIL
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Fama French factors: the market, SMB, HML.

Other factors: UMD, CMA, RMW


𝐸(𝑃1 ) − 𝑃0 + 𝐸(𝐷𝑖𝑣1 ) 𝐸(𝑃1 ) − 𝑃0 𝐸(𝐷𝑖𝑣1 )
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐻𝑃𝑅 = 𝐸(𝑟) = = +
𝑃0 𝑃0 𝑃0
𝐸(𝑃1 ) + 𝐸(𝐷𝑖𝑣1 ) 𝐷1 + 𝑃1
𝑉0 = =
1+𝑘 1+𝑘
𝐷1 𝐷2 𝐷𝐻 + 𝑃𝐻
𝑉0 = + + ⋯ +
1 + 𝑘 (1 + 𝑘)2 (1 + 𝑘)𝐻
𝐷0 (1 + 𝑔) 𝐷0 (1 + 𝑔)2 𝐷1
𝑉0 = + 2
+⋯=
(1 + 𝑘) (1 + 𝑘) 𝑘−𝑔
𝐶𝐹𝐻+1
𝐶𝐹1 𝐶𝐹2 𝐶𝐹𝐻 + 𝑟 − 𝑔
𝑉0 = + 2
+ ⋯+ 𝐻
1+𝑟 (1 + 𝑟) (1 + 𝑟)
𝐹𝐶𝐹𝐹 = 𝐸𝐵𝐼𝑇(1 − 𝑡𝐶 ) 𝐹𝐶𝐹𝐸 = 𝐹𝐶𝐹𝐹
+ 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 − 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒(1 − 𝑡𝑐 )
− 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 + 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑁𝑒𝑡 𝐷𝑒𝑏𝑡
− 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑁𝑒𝑡 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙

𝐸 𝐷
𝑊𝐴𝐶𝐶 = 𝑅𝐸 + 𝑅𝐷 (1 − 𝑡𝐶 )
𝑉 𝑉
𝛽 𝐷𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡
𝛽𝐿∗ = × [1 + ( ) (1 − 𝑡𝑐 )]
𝐷 𝐸𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡
1 + ( 𝑎𝑐𝑡𝑢𝑎𝑙 ) (1 − 𝑡𝑐 )
𝐸𝑎𝑐𝑡𝑢𝑎𝑙
𝐼𝑚𝑝𝑙𝑖𝑒𝑑 𝑃𝑟𝑖𝑐𝑒𝑓𝑖𝑟𝑚 = 𝑃/𝐸𝑐𝑜𝑚𝑝𝑠 × 𝐸𝑃𝑆𝑓𝑖𝑟𝑚
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝐸𝐹𝑖𝑟𝑚
𝑅𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑃/𝐸 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝐸𝑀𝑎𝑟𝑘𝑒𝑡
𝑃𝐸𝐹𝑖𝑟𝑚
𝑃𝐸𝐺 =
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒 × 100
1
𝐶𝑜𝑢𝑝𝑜𝑛 𝑃𝑎𝑦𝑚𝑒𝑛𝑡𝑠 𝑃𝑎𝑟 𝑉𝑎𝑙𝑢𝑒 1−( )
(1+𝑟)𝑡
𝐵𝑜𝑛𝑑 𝑉𝑎𝑙𝑢𝑒 = ∑𝑇𝑡=1 + & 𝑃𝑉𝑎𝑛𝑛𝑢𝑖𝑡𝑦 = 𝑃𝑀𝑇 ×
(1+𝑟)𝑡 (1+𝑟)𝑇 𝑟

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐵𝑜𝑛𝑑 𝑃𝑟𝑖𝑐𝑒𝑁𝑒𝑤 − 𝐵𝑜𝑛𝑑 𝑃𝑟𝑖𝑐𝑒𝑂𝑙𝑑


𝐻𝑃𝑅 =
𝐵𝑜𝑛𝑑 𝑃𝑟𝑖𝑐𝑒𝑂𝑙𝑑
𝐶𝐹𝑡 /(1 + 𝑦)𝑡
𝑤𝑡 =
𝐵𝑜𝑛𝑑 𝑃𝑟𝑖𝑐𝑒
𝑇

𝐷 = ∑ 𝑡 × 𝑤𝑡
𝑡=1

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