Tài chính ngân hàng - Return concepts

Return ConceptsPresenterVenueDateWhy Focus on Return Concepts?To evaluate expected and past performanceTo understand risk premiumsTo estimate discount rates for valuationHolding Period ReturnOther Return ConceptsRequired ReturnReturn from Convergence of Price to Intrinsic ValueDiscount RateInternal Rate of ReturnEquity Risk PremiumCurrent expected risk-free returnEquity risk premium Required return on equityEquity Risk Premium EstimatesHistorical EstimatesForward-Looking EstimatesGordon growth model estimatesMacroeconomic model estimatesSurvey estimatesIssues for Using Historical Equity Risk Premium EstimatesLength of Sample PeriodBalancing long-term and short-term considerationsGeometric vs. Arithmetic MeanGeometric more accurately reflects future valueChoice of Risk-Free ReturnOn-the-run long-term TreasuriesSurvivorship BiasUsing returns from surviving firms artificially inflates estimates of returnStrings of Unusual Events Historical Equity Risk Premium EstimatesForward-Looking Equity Risk Premium EstimatesGordon growth model risk premiumDividend yieldEarnings growth rateGovernment bond yieldForward-Looking Equity Risk Premium Estimates Macroeconomic Model Equity Risk Premium (ERP)Example: Forward-Looking Equity Risk PremiumYield on treasury bonds3.8%Yield on Treasury inflation-protected securities1.8%Expected growth in labor productivity1.5%Expected growth in labor supply1.0%Expected growth in the P/E 0.0%Expected dividend yield2.7%Return from reinvestment of income 0.1%Example: Forward-Looking Equity Risk Premium Example: Forward-Looking Equity Risk Premium Example: Forward-Looking Equity Risk Premium Estimating the Required Return on an Equity InvestmentCapital Asset Pricing ModelMultifactor ModelsFama–French modelPastor–Stambaugh modelMacroeconomic modelsStatistical modelsBuild-Up MethodCapital Asset Pricing Model(CAPM)Where E(Ri) = Required return on equity for security iRF = Current expected risk-free return i = Beta of security iE(RM) = Expected return on the market portfolioE(RM) – RF = Equity risk premiumAssumptionsInvestors are risk averseInvestment is based on mean–variance optimizationRelevant risk is systematic riskBeta Estimation IssuesChoice of Market IndexS&P 500 and NYSE Composite are common choices in the United StatesLength & Frequency of DataFive years of monthly data is most common choiceAdjusted BetasBetas move towards 1.0 over timeThinly Traded and Private FirmsAdjust comparable betas for leverageMultifactor Models:Fama–French ModelRequired Return on EquityValue PremiumSize PremiumMarket Risk PremiumRisk-Free ReturnFama–French ModelwhereSMB = The return to small stocks minus the return to large stocksβsize = The sensitivity of security i to movements in small stocksHML = The return to value stocks minus the return to growth stocksβ value = The sensitivity of security i to movements in value stocksPASTOR–STAMBAUGH MODELwhereLIQ = The return to illiquid stocks minus the return to liquid stocksβ liq = The sensitivity of security i to movements in illiquid stocksExample: Fama–French ModelRisk-free rate3.0%Equity risk premium5.0%Beta1.20Size premium2.2%Size beta0.12Value premium3.8%Value beta0.34Example: Fama–French ModelBuild-Up MethodsFor Private FirmsTypical risk premiumssize firm-specific riskOther risk premiumsmarketability controlBond Yield plus Risk Premium MethodUseful if firm has public debtYTM on long-term debt + risk premiumRequired Return on EquityRisk-Free RateEquity Risk PremiumOther Risk PremiumsOther Risk DiscountsInternational Considerations for Required ReturnsExchange RatesEmerging MarketsCountry spread modelCountry risk rating modelWeighted Average Cost of CapitalWeighted Average Cost of CapitalDebtCost of DebtMarket Value of DebtTax RateEquityCost of EquityMarket Value of EquityWeighted Average Cost of CapitalWhereMVD = Current market value of debtMVCE = Current market value of common equityrd = Before-tax cost of debt (which is transformed into the after-tax cost by multiplying it by 1 – Tax rate)re = Cost of equity Example: Weighted Average Cost of CapitalRisk-free rate3.0%Equity risk premium5.0%Beta1.20YTM of long-term bond6.1%Long-term debt/Total capital at market value40%Tax rate30%Example: Weighted Average Cost of CapitalChoice of Discount RateCash Flows to the FirmWACCCash Flows to EquityRequired return on equityNominal Cash FlowsNominal discount ratesReal Cash FlowsReal discount ratesSummaryReturn ConceptsHolding period return, realized return, expected return, required return, discount rate, return from convergence of price to intrinsic value, and IRREquity Risk Premium = Required return on equity – Risk-free returnHistorical estimatesIssues in estimation: Sample period length, geometric vs. arithmetic mean, risk-free return choice, survivorship bias, strings of unusual events Forward-looking estimates: Gordon growth model estimates, macroeconomic model estimates, survey estimatesSummaryModels for the Required Return on EquityCapital asset pricing modelMultifactor modelsFama–French modelPastor–Stambaugh modelMacroeconomic modelsStatistical modelsBuild-up methodBeta Estimation IssuesChoice of market indexLength and frequency of dataAdjusted betasThinly traded and private firmsSummaryInternational Considerations for Required ReturnsExchange ratesEmerging marketsWeighted Average Cost of CapitalUse market values, marginal tax rates, current bond YTM, and equity required return Choice of Discount RateUse WACC for firm cash flowsUse equity required return for equity cash flowsUse nominal rates for nominal cash flows