Andreas Park PRO
Professor of Finance at UofT
Trading Case:
EV1
The quick and dirty on EV1
New symbol?
What's notable about the stock?
PI
has a fundamental value
What do you have to do?
- build an EXCEL model for the fundamental value
Anything special?
- follow the news
- update news in EXCEL
- find a way to automate updating
Background on Theory
- based on price-earnings ratios
- basic idea: discounted future earnings (100% paid out in dividends)
- In math:
\[P=\sum_{t=1}^\infty \frac{d_t}{(1+r)^t}\] - With \(d_t=e_t=E\):
\[P=\sum_{t=1}^\infty \frac{E}{(1+r)^t}=\frac{E}{r}.\] - Therefore
\[\frac{P}{E}=\frac{1}{r}.\]
Background on Theory
- In practice, \(r\) is the discount rate (or required rate) and we write
\[\text{Price}=\frac{\text{earnings per share}\times\text{payout ratio}}{\text{discount rate}}.\]
- here, discount rate is \(r=8\%\) and \(1/0.08=12.5\) so that
\[\text{Price}=\frac{\text{EPS}\times100\%}{0.08}=\text{EPS}\times 12.5.\]
Background on Theory
What's important for you?
Text
\text{fundamental}=(\text{EPS}_{\text{Q1}}+\text{EPS}_{\text{Q2}}+\text{EPS}_{\text{Q3}}+\text{EPS}_{\text{Q4}})\times 12.5.
Here is what you know about earnings:
realized values
estimated values
will be updated during case
MGT435: EV1
By Andreas Park
