Equity Value Models with a Q and A from a student.

Question from a student:

In this video, you discussed the 7 growth valuation methods
basic calculations. This was helpful to understand the zero growth, constant
growth, variable growth, FCF, book value per share, liquidation and P/E
analysis. The video was helpful but it was a little hard to hear compared to
your other videos.

This video raised some questions regarding the valuations:

1.)  Does the required rate of return change depend on the
investor calculating the rate at that time or is it a collective rate among
investors?

2.)  For variable growth, do you always have to look at
dividend growth and the discounted rate? For example, on the spreadsheet you
showed dividend grows at 10%  in one column and 10 % discounted at 15% in
the other.

3.)  When looking at Morgan Stanley it traded at 32.07 and
the P/E is 16.33. What  P/E would you like to see in a stock compared to
the trading price? Is higher always better?

Answer:

1. The required rate of return is the Weighted Average Cost
of Capital (WACC) for each company , we will discuss this concept later in the
course.

2.You must assume a growth rate for dividends and apply the
WACC in each case. Normally you would look at past performance.

3. Actually higher is worse because investors may be
overpaying for earnings. In this market the average S and P stock is at about
17 or about a 6% earnings yield . This is 4% above risk free treasuries which
seems reasonable. My concern is whether companies can deliver earnings growth
or do interest rates outstrip earnings growth.