No. The Professor thinks the stock is worth $200. He proves it with a normal DCF and also a Diluted calculation. Therefore, he says, his estimation is consistent regardless of whether there is a Dilution or not.
If someone else thinks it’s worth $250, they’d be wrong, because via the Dilution approach, they’d find out that it’s only worth $214 (An over-estimation of $36). Similary, if someone thinks it’s worth only $175, they’d be wrong too, since the value via the Dilution approach would turn out to be $194 (An under-estimation of $19).
I think you’re confused with the word ‘we’ in “If Tesla is able to issue shares at a higher price (than its intrinsic value), we will have over estimated the value per share”. What he means (At least what I think he means) is that “If Tesla is able to issue shares at a higher price (than its intrinsic value), the person assuming a higher intrinsic value will have over estimated the value per share”.
I think what the Prof is saying is that if other assumptions remain the same, both the DCF value and the Diluted Method value will yield the same result. This will be the case for everyone and in every case, and not just for the Prof’s $200 value that was used in the illustration. Btw, the Prof’s actual estimate of intrinsic value was $189, not $200. I think he used $200 as it is a nice round figure.
It’s common knowledge that issuing new shares at a higher price will increase the share’s diluted value. It’s simple math.
So why did the Prof go through the trouble of creating a complex model with assumptions just to show what can done in a 2-3 lines of formulas? He specifically states that he wanted to show how his estimated value and the dilution method yielded the same results. According to his assumptions, no figure other than $200 yields that result (I mean, the break-even).
The Prof took all the trouble to demonstrate that a DCF valuation automatically incorporates the expected dilution that can be expected to occur to compensate for the negative cash flows in the initial years. That is a bit counter intuitive (which the Prof acknowledges), hence the trouble taken.
If what you are saying is right, the Prof has found the holy grail of valuation, where one value is THE right one, all others are automatically proved flawed, in which case Musk’s investor would have offered $210, not $420!
In any case, I will be happy to be proven wrong on this. Someone get the Prof on Valuepickr!
Nope. The value is right only given the Professor’s assumptions are, which is always debatable. Without it, it will depend on what the forecaster assumes the growth rates and discounting factor to be. The Professor was trying to show just that - I mean, how consistent his DCF value was.
I can edit the assumptions of the model and come up with a different break-even value. That wouldn’t mean my value is correct, however.
That is what the Prof would say as well, about his own estimate of value.
However, given any set of assumptions by anyone, the DCF value will be similar to the value arrived at by the ‘Dilution Method’, and that is the truism that the Prof wants to demonstrate. It has nothing to do with any ‘right’ value or ‘wrong’ value, as that is subjective.
If my DCF shows the value of a Tesla share as $793, the value arrived at by the ‘Dilution Method’ would also be similar.
I have few basic questions about ‘Reading a balance sheet’.
Does only the ‘Net Cash Flow’ move into ‘Reserves’ ? When does the cash from a company move into ‘Reserves’ section
Suppose if a company needs money,can the company take it from its ‘Reserves’. I am asking this question because many company seek debt from ‘banks’ or "NBFCs’, even though they have enough money in their reserves ? @dineshssairam@Gaurav_Agarwal
I am presenting a simplified version here for understanding -
Company declares Net Profit/Net Loss. Company pays dividend from Net Profit. The remaining net profit is added/transfered/appropriated to Reserves and Surplus. Now equation for balance-sheet is
Or, Assets = Equity + Liabilities
therefore, when equity increases we should have corresponding increase in Assets.
Now, Cash + Bank balances are part of assets, therefore a corresponding increase has to happen in cash + bank balances.
Now I understand that ,only the 'Cash and Bank ’ present under the Other assets section in the ‘Real Liquid Money’ (which it can distribute to their investors or use for doing any future capex) present with the Company.
BlockquoteNow, Cash + Bank balances are part of assets, therefore a corresponding increase has to happen in cash + bank balances.
The increase could be in any assets, not necessary cash + bank bal.
It depends on how the company reinvests the retained profits. It could be deployed as capital expenditure to increase fixed assets, or to increase working capital in the form of higher inventories or higher receivables. Sometimes given out as loans to other entities.
Also the cash coming in from the Loans taken can be similarly used for several purposes including paying out as dividends (yes. some companies could do that).
Yes Akbar bro you are correct .
My question was around Cash and Reserves…May be that is why @Gaurav_Agarwal explained me accordingly ,so that i can understand .
Thank you both for clearing my doubt
Book values given in screener.in are different from the values found from the formula Shareholders’ Equity/Number of Outstanding Shares.
Example: HCL Tech has share capital + reserves = 32664+285 = 32949 cr. Number of outstanding shares = 139.24 crores. BV = 32949/139.24 = 236.63. Screener.in gives this value as 300.85.
Please explain what I am missing.
I had purchased some shares in minda industries at around 1277 but now the price shows as 409. I heard that minda industries has issued bonus shares which resulted in the price decrease. So I would like to know how I can reconcile the difference because my stock portfolio shows a loss and minda industries has not yet credited my demat account with the bonus shares.
Thanks
Hi guys, How do I protect my portfolio against a stock market crash? Or in other words what are the different strategies I can use to protect my investment against a stock market crash?
