MELVIN JASON S.

DE VERA, MBA, CIS, CFMP, AFA®

Investment Consultant, First Metro Asset Management Inc. (FAMI)
Accredited Financial Analyst (AFA®) by American Academy of Financial Management
Head Coach, Certified Financial Market Professional Program (CFMP)
President, Finance Educators Association of the Philippines (Fin.Ed)
Deloitte-FINEX 2015-2016 Outstanding Finance Educator for the National Capital Region
Accredited Capital Market Investment Teacher and Practitioner
by the Capital Market Institute of the Philippines
Securities Valuation
STOCK VALUATION METHODS OR METHODS OF

WINTER
DETERMINING THE INTRINSIC VALUE OF THE
COMMON STOCK OF A COMPANY:

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STOCK VALUATION METHODS OR METHODS OF
DETERMINING THE INTRINSIC VALUE OF THE
COMMON STOCK OF A COMPANY:

N.B.:
1. Sometimes the WACC or the ROE is used
in lieu of k
2. WACC = the company’s weighted average
cost of capital
3. ROE = the company’s return on equity
= net income after tax ÷ total
shareholder’s equity
STOCK VALUATION METHOD
(continuation)
WORKSHOP PROBLEM: (to be solved by group
after the presentation):

A plans to buy ABC Corp. common stocks now. He

projects that ABC would pay annual dividends of P5, P6
and P8 per share at the end of years 1, 2 and 3,
respectively, and that the price of the stock at the end of
year 3 would be P100 per share. A expects the rate of
return on the PSEi to be 15% per year and the risk free
rate to be 6% p.a. The systematic risk on the stock is 1.5.
If the stock’s current market price is P71 per share,
a) Calculate the intrinsic value of the stock.
b) Is the stock worth buying now? EXPLAIN.
ANSWER:
STOCK VALUATION METHOD
S(continuation)
 STOCK VALUATION METHOD

WINTER
(continuation)

N.B.: The DDM asserts that

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1. The intrinsic value P0 of a common stock is
equal to the PV of all expected future
dividends into PERPETUITY.

2. The intrinsic value P0 of a common stock is

determined ultimately by the DIVIDENDS
that the stock would pay in the future.
STOCK VALUATION METHOD
(continuation)
STOCK VALUATION METHOD
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STOCK VALUATION METHOD
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 STOCK VALUATION METHOD
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WORKSHOP PROBLEM FOR METHOD 4( to be solved by group

after the presentation):

Last year, ABC Corporation paid out dividends of P6 per share and
it is assumed that these dividends will grow annually at a constant rate
of 10%. It is expected that the rate of return on the PSEi will be 20%
p.a. and that the risk-free rate will be 5% p.a. If the systematic risk on
ABC’s common stock is 1.2 and if its current market price is P54 per
share,

a.) determine the intrinsic value of the stock.

b.) Is ABC’s common stock worth buying? EXPLAIN.
 STOCK VALUATION METHOD
(continuation)
WORKSHOP PROBLEM:

ABC Corporation pays annual common stock dividends that grow

or increase at a constant rate of 10% per year. During the current year,
ABC paid dividends of P8 per common share. By the end of year 1, it
is estimated that ABC will earn P70 per common share, 85% of which
would be retained by the company. It is expected during year 1 that the
rate of return on the PSEi would be 15% and that the risk-free rate
would be 6% p.a. It is also known that the systematic risk on the stock
is 1.5.
a) Determine the intrinsic value of the stock
b) If the current market price of the stock is P95 per share, is
the stock worth buying now or not?
c) Estimate the price of the stock at the end of year 1.
ANSWERS: P0 = ; P1 =
STOCK VALUATION METHOD
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5
 STOCK VALUATION METHOD
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WHERE:
FCFt = the EXPECTED free cash flow at the
end of the year t
= the amount of cash flow available to
investors (i.e., the shareholders and the providers
of LT debts or creditors) after the company has
set aside all amounts or monies needed for
operation and to pay for the
company’s investments in fixed assets and current
assets.
METHOD 5: The DISCOUNTED FREE
CASH FLOW Method

8.2) STEP 2: Determine the market value VLTD of

all the company’s LT debts.
8.3) STEP 3: Determine the market value VPS of
the company’s preferred stocks
8.4) STEP 4: Obtain the market value VCS of the
company’s common stocks;
i.e., VCS = VT – VLTD – VPS
8.5) STEP 5: Determine the intrinsic value P0 of the
company’s common stocks;
i.e.,
 STOCK VALUATION METHOD
(continuation)

WORKSHOP EXERCISE FOR METHOD 5:

The 5-year projected free cash flows of ABC

Corporation are as follows:
YEAR FCF
Y1 P400,000
Y2 450,000
Y3 520,000
Y4 560,000
Y5 600,000
 STOCK VALUATION METHOD
(continuation)
Beyond Y5, ABC’s annual cash flow is projected TO GROW AT A
CONSTANT RATE of 3% p.a. The market value of all the company’s
LT debts is P3.1M while the market value of all its preferred stocks is
P800,000. The company’s WACC is 9% p.a. If the company issued
100,000 outstanding common shares, find the intrinsic value per share
of these common stocks.

(Hint: To find the value at the end of 2021 of all the FCF’s from year-
end 2023 and beyond, use an equation homologous to the GORDON-
SHAPIRO MODEL equation for obtaining P0. This equation is

FCF Y5 & BEYOND =FCF Y5 X ( 1 + g )

___________________________

( k – g)
Tha nk y ou!