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Course

Equity Valuation in R

IntermediateSkill Level

4.8+

Updated 08/2022

Learn the fundamentals of valuing stocks.

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RApplied Finance4 hr16 videos58 Exercises4,750 XP8,438Statement of Accomplishment

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Course Description

How do we know when a stock is cheap or expensive? To do this, we need to compare the stock's price with its value. The price of the stock can be obtained by looking at various public sources, such as Yahoo Finance or Google Finance. The value of the stock though is much harder to identify. Every investor has to form his or her valuation of the stock. In this course, you will learn the fundamentals of valuing stocks using present value approaches, such as free cash flow to equity and dividend discount models, and valuation multiples. By the end of this course, you will be able to build your own valuation models.

Prerequisites

Importing and Managing Financial Data in R

1

Present Value Approaches

Many individuals and institutions invest in equities. To do so effectively, the investor must have a solid understanding of how the value of the equity compares to the stock price. In this course, we focus on fundamental concepts of equity valuation. We begin with a discussion of time value of money and then move on to the first of two discounted cash flow methods we will discuss - the free cash flow to equity valuation model.

Course Intro and Fundamental Valuation

Time Value of Money

Difference Between Valuing Enterprise and Equity Cash Flows

The Free Cash Flow to Equity Model

Calculating Operating Profit

Calculate Free Cash Flow to Equity

Calculating Terminal Value

Calculating Equity Value

Calculating Present Value of Free Cash Flow to Equity

Calculate Present Value of Terminal Value

Calculate Equity Value

2

Perpetuity Growth Rate, Analyzing Projections, and Using a Dividend Discount Model

One of the critical components of free cash flow to equity valuation is using reliable projections. In the first part of this chapter, we will discuss ways to analyze the projections to help us identify the right questions to ask. In the second part of this chapter, we will go through the second of our discounted cash flow models - the dividend discount model. In this approach, we discount expected dividends instead of free cash flows.

Analyzing the Projections

Analyze Revenue Trends - Bar Chart

Analyze Revenue Trends - Regression

Perpetuity Growth Rate

Calculate Retention Ratio

Perpetuity Growth Rate Calculation

Dividend Discount Model

Valuing Preferred Stock

Valuation Assuming No Dividends For First Few Years

Valuation Assuming 2-Stages of Dividends

3

Discount Rate / Cost of Capital Estimation

To be able to discount cash flows, we need a discount rate. For the free cash flow to equity and dividend discount model, the cost of equity is the appropriate discount rate. In this chapter, we will discuss how each of the components of the cost of equity are calculated.

What is a discount rate?

Risk and Return

Calculating Returns

Estimating Beta

Unlevering Betas

Hamada vs. Fernandez Formula

Beta Unlevering Exercise

Beta Relevering Exercise

Risk-Free Rate and Equity Risk Premium

Obtain Risk-Free Rate Data

Calculate Historical Equity Risk Premium

Calculate the Cost of Equity

4

Relative Valuation

Relative valuation allows us to use the valuation of comparable companies to infer the value of our subject firm. In this chapter, we discuss how to identify comparable companies and how to calculate valuation multiples. We also show how to analyze the determinants of multiples.

Relative Valuation

Identifying Comparable Firms

Valuation Multiples

Calculating Valuation Multiples

Calculating the Relevant Multiple

Implied Price

Analyzing Determinants of Multiples

Calculate ROE and P/B

Plot P/B vs. ROE

Strength of Relationship

Implied Price Using Regression

Difference in Implied Values

5

Comprehensive Exercise

This chapter combines the lessons from Chapters 1 to 4 in a series of exercises. You will be asked to inspect the data and to value the firm using discounted cash flow and relative valuation approaches. At the end, you will combine the results in a summary table.

Fundamental Valuation: Analyzing Projections

Visually Inspecting the Data

Using Regression to Test the Projections

Fundamental Valuation: Implementation

Cost of Equity

Calculate Value During Projection Period

Calculate the Terminal Value

Equity Value Per Free Cash Flow to Equity Model

Equity Value per Dividend Discount Model

Relative Valuation

Equity Value Per Price-to-Earnings Multiples

Combine valuation into a summary table

Congratulations!

Equity Valuation in R

Course
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FAQs

Is this course suitable for beginners?

Yes! The course starts by introducing the fundamentals of valuing stocks and progresses gradually so that all the core concepts of equity valuation, such as discounted cash flow and relative valuation, are grasped.We recommend first taking the "Importing and Managing Financial Data in R" course.

Who will benefit from this course?

This course is beneficial for anyone looking to enter careers such as financial analysis, equity research, portfolio management and investment banking.

Will I receive a certificate at the end of the course?

Yes, upon completion, participants can earn a Certificate of Completion from DataCamp.

Is there a comprehensive exercise at the end of the course?

Yes, at the end of the course there is a comprehensive exercise to test your understanding of the core concepts of equity valuation.

What topics does this course cover?

This course covers the fundamentals of valuing stocks using various approaches such as Discrete Cash Flow to Equity, Dividend Discount Model, Cost of Capital Estimation and Relative Valuation.

Does the course cover the time value of money?

Yes, the course begins by introducing the fundamentals of the time value of money and how to use it in valuation.

How long will it take to complete this course?

The course takes approximately 4 hours to complete, although the exact duration will depend on your level of experience.

Is the course suitable for intermediate or experienced investors?

Yes, this course is suitable for both beginners and experienced investors. It introduces the fundamentals of equity valuation and then progresses gradually to more advanced topics.

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