COMPANY ANALYSIS: APPLIED VALUATION

SAPM
Security Analysis & Portfolio Management PGDM FT (2008 - 2010) By: Rajat Jhingan

COMPANY ANALYSIS: APPLIED VALUATION

Forecast not only the E x p e c t e d R e t u r n but also the E x p e c t e d R i s k of an investment.

By : Rajat Jhingan

There are 3 modern techniques of Analysis:

Regression Analysis Tr e n d A n a lys is D e c is io n Tr e e A n a lys is

Approaches to Stock Valuation

P/E ratio models

2

Dividend Discount Model

COMPANY ANALYSIS: APPLIED VALUATION My Agenda:

Regression

& Correlation Analysis

By : Rajat Jhingan

Trend Analysis

Decision

Trees
in Implementing Newer Techniques

Problem Areas

COMPANY ANALYSIS: APPLIED VALUATION

Regression & Correlation Analysis in Forecasting Revenues & Expenses.

Regression Analysis
Linear Regression Relationship between two Variables

By : Rajat Jhingan

Correlation Analysis
Goodness of Fit between these variables

Multiple Linear Regression

Relationship of Several Variables
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COMPANY ANALYSIS: APPLIED VALUATION

Regression Equations are built upon the relationships such as:

By : Rajat Jhingan

Relationship between External Economic Variables & Company Analysis (e.g. sales) Relationship between Internal Company Variables & External Industry Variables. Relationship Among : Industry (e.g. benchmark EPS), Economic(e.g. GNP) , Firm Variables (e.g. Cost of Funds) & Company Expenses.

Used for end use analysis. Use of Statistical & Economic foundation. Able to link internal & external variables , revenue & expenses & other complex interrelationships.

COMPANY ANALYSIS: APPLIED VALUATION

Correlation acts as a specific measure of the explanatory power of a regression equation. Correlation explains :

By : Rajat Jhingan

How well the Independent Variable explains the Dependent Variables in the Regression Equation.

Regression helps to establish functional relationship between two variables. Regression Equation of Y on X Y = a + bX
X- X = ry (Y Y) y
r = cov (X,Y) xy

COMPANY ANALYSIS: APPLIED VALUATION

T R E N D A N A LY S I S Trend Analysis of a Time Series utilizes regression analysis. Differentiation between Trend Analysis & Regression Analysis.
Trend Analysis Examine behaviour of economic series over a period of time i.e. one real variable which is being regressed over a period of years.
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By : Rajat Jhingan

Regression Analysis

Degree of Correspondence between two real variables

COMPANY ANALYSIS: APPLIED VALUATION

Equation of a fitted straight line use for forecasting Y = a + bx

By : Rajat Jhingan

Y = Dependent Variable a = Constant (Y intercept) Calculated from regression analysis. b = Constant (Slope of a line) X = Time Period (Independent Variable)

Example : Using Method of Least Squares for Trend Analysis. Formulas: Y = a+bX a = Y/N , b = XY/ X2

COMPANY ANALYSIS: APPLIED VALUATION

Make an estimate of profit for the year 1997? Y = a+bX a = Y/N , b = XY/ X2
a = 76
b = 4.68 Y = 76 + 4.68 X Estimated Profit For 1997, (replace X by +4) Y = 76 +(4.86 * 4) = 95.44 Thousand
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By : Rajat Jhingan

COMPANY ANALYSIS: APPLIED VALUATION

TREND LINE
By : Rajat Jhingan

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COMPANY ANALYSIS: APPLIED VALUATION

Decision Trees Technique aimed to formalize & simplify the procedure involved in the solution of a problem. It overcomes the criticism of traditional approaches:
Based on subjective analysis & resulted in a point estimate. Did not carry, formal measurement of probability. Lacked objective measurement of quality.

By : Rajat Jhingan

It assesses the alternative actions & probabilities existing in an investment environment. It multiples various independent outcomes & their probabilities w.r.t. the desired sequence of occurring.

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COMPANY ANALYSIS: APPLIED VALUATION

Problem areas in implementation of newer techniques Regression Analysis

By : Rajat Jhingan

To develop plausible economic relationships between variables. (Analysts Job)

Relationship develops after Examination of past data Economical rational to explain logical relationship Application & Testing of Variables

Isolating key explanatory variables - time consuming process Requires understanding of: (both Analyst & Investor)

Firms mode of operation Structure & Performance of Industry

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COMPANY ANALYSIS: APPLIED VALUATION

Problem areas in implementation of newer techniques
D e c i s i o n Tr e e s

By : Rajat Jhingan

Generating the necessary Input

Becomes a matter of simulation but not unrealistic

Insight to understand the working of firm & industry

Knowledge of historical salves volume, revenue, costs to determine the probability of happening of event. Continued watch on market, industry, firm & economy

Otherwise take help of Institutional Analysts:

E.g. - S&P, Crisil, Moodys, Vaule Line,Brokerage firms reports, Wall Street Transcripts.
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