Valuation Editor - Discounting Cash Flows

// +------------------------------------------------------------+
//   Model: Simple Excess Return Model 								
//   © Copyright: https://discountingcashflows.com
// +------------------------------------------------------------+

Input(
  {
    _DISCOUNT_RATE: '',
    _RETURN_ON_EQUITY: '',
    _GROWTH_IN_PERPETUITY: '',
    _MARKET_PREMIUM: '',
    _RISK_FREE_RATE: '',
    BETA: '',
    HISTORICAL_YEARS: 10
  },
  [{
    parent:'_DISCOUNT_RATE',
    children:['BETA', '_RISK_FREE_RATE', '_MARKET_PREMIUM']
  }]
);

$.when(
  get_income_statement(),
  get_income_statement_ltm(),
  get_balance_sheet_statement(),
  get_balance_sheet_statement_quarterly('length:2'),
  get_profile(),
  get_dividends_annual(),
  get_treasury(),
  get_fx(),
  get_risk_premium()).done(
  function($income, $income_ltm, $balance, $balance_quarterly, $profile, $dividends, $treasury, $fx, $risk_premium){
  try{
    var response = new Response({
      income: $income,
      income_ltm: $income_ltm,
      balance: $balance,
      balance_quarterly: $balance_quarterly,
      balance_ltm: 'balance_quarterly:0',
      profile: $profile,
      treasury: $treasury,
      dividends: $dividends,
      risk_premium: $risk_premium,
    }).toOneCurrency('income', $fx).merge('_ltm');
    response.balance[0]['date'] = 'LTM';
    
    // +---------------- ASSUMPTIONS SECTION -----------------+
    // edit projectionYears if you need a longer projection period
    var projectionYears = 5;
    setAssumption('_MARKET_PREMIUM', response.risk_premium.totalEquityRiskPremium );
	setAssumption('_RISK_FREE_RATE', response.treasury.year10);
    setAssumption('_GROWTH_IN_PERPETUITY', response.treasury.year10);
    setAssumption('BETA', response.profile['beta']);
    setAssumption('_DISCOUNT_RATE', toP(getAssumption('_RISK_FREE_RATE') + getAssumption('BETA')*getAssumption('_MARKET_PREMIUM')));
    
    var sensitivity = 0.01;
    var prefDividendsRatio = Math.abs((response.income[0].eps * response.income[0].weightedAverageShsOut - response.income[0].netIncome) / response.income[0].netIncome);
    var commonIncome = [];
    if( prefDividendsRatio > sensitivity ){
      commonIncome = ['eps:0', '*', 'weightedAverageShsOut:0'];
    }
    else{
      commonIncome = ['netIncome:0'];
    }
    // Setup Original Data
    var original_data = new DateValueData({
      'netIncome': new DateValueList(response.income, 'netIncome'),
      'totalStockholdersEquity': new DateValueList(response.balance, 'totalStockholdersEquity'),
      'weightedAverageShsOut': new DateValueList(response.income, 'weightedAverageShsOut'),
      'eps': new DateValueList(response.income, 'eps'),
      'adjDividend': new DateValueList(response.dividends, 'adjDividend'),
    });
    var nextYear = original_data.lastDate() + 1;
    
    // Compute historical values and ratios
    var historical_computed_data = original_data.setFormula({
      'commonIncome': commonIncome,
      'preferredStockDividends': ['netIncome:0', '-', 'commonIncome:0'],
      'dividendsPaidToCommon': ['adjDividend:0', '*', 'weightedAverageShsOut:0'],
      'bookValue': ['totalStockholdersEquity:0', '/', 'weightedAverageShsOut:0'],
      '_returnOnEquity': ['commonIncome:0', '/', 'totalStockholdersEquity:-1'],
      '_payoutRatio': ['adjDividend:0', '/', 'eps:0'],
      'retainedEarnings': ['eps:0', '-', 'adjDividend:0'],
    }).compute();
    
    var averageReturnOnEquity = historical_computed_data.get('_returnOnEquity').sublist(nextYear - getAssumption('HISTORICAL_YEARS')).average();
	setAssumption('_RETURN_ON_EQUITY', toP(averageReturnOnEquity));
    var stable_payout_ratio = 1 - (getAssumption('_GROWTH_IN_PERPETUITY') / getAssumption('_RETURN_ON_EQUITY'));
    
    // Compute 5 years of forecasted values and ratios
    var forecasted_data = historical_computed_data.setFormula({
      'bookValue': ['bookValue:-1', '+', 'retainedEarnings:0'],
      'eps': ['bookValue:-1', '*', getAssumption('_RETURN_ON_EQUITY')],
      'adjDividend': ['eps:0', '*', stable_payout_ratio],
      'retainedEarnings': ['eps:0', '-', 'adjDividend:0'],
      '_returnOnEquity': ['eps:0', '/', 'bookValue:-1'],
      'equityCostPerShare': ['bookValue:-1', '*', getAssumption('_DISCOUNT_RATE')],
      'excessReturnPerShare': ['eps:0', '-', 'equityCostPerShare:0'],
      '_costOfEquity': [getAssumption('_DISCOUNT_RATE')],
      'beginningBookValue': ['bookValue:-1'],
    }).compute({'forecast_years': projectionYears});
    // +------------- END OF ASSUMPTIONS SECTION -------------+
    
    // +---------------- MODEL VALUES SECTION ----------------+
    var currency = response.currency;
    var bookValue = historical_computed_data.get('bookValue').valueAtDate('LTM');
    var excessReturns = forecasted_data.get('excessReturnPerShare').valueAtDate(nextYear);
    if(excessReturns <= 0){
        warning("Excess return is negative. Either EPS is negative or the Cost of Equity (Discount Rate) is higher than the Return on Equity.");
    }
    var terminalValue = excessReturns / (getAssumption('_DISCOUNT_RATE') - getAssumption('_GROWTH_IN_PERPETUITY'));
    var valuePerShare = terminalValue + bookValue;
    // If we are calculating the value per share for a watch, we can stop right here.
    if(_StopIfWatch(valuePerShare, currency)){
      return;
    }
    _SetEstimatedValue(valuePerShare, currency);

print(valuePerShare, 'Estimated Value', '#', currency);
    print(bookValue, "Book value of equity invested", '#', currency);
    print(forecasted_data.get('bookValue').valueAtDate(nextYear), "Next year's estimated book value", '#', currency);
    print(terminalValue, "Present value of future excess returns", '#', currency);
    print(excessReturns, "Excess Return per share", '#', currency);
    print(getAssumption('_DISCOUNT_RATE'), "Cost of Equity (the discount rate)", '%');
    print(averageReturnOnEquity, "Average historical Return on Equity", '%');
    print(historical_computed_data.get('_payoutRatio').sublist(nextYear - getAssumption('HISTORICAL_YEARS')).average(), "Average historical Payout Ratio", '%');
    print(stable_payout_ratio, "Payout Ratio used", '%');
    print(response.treasury.year10/100, 'Risk Free Rate of the 10 Year U.S. Treasury Note', '%');
    // +------------- END OF MODEL VALUES SECTION ------------+
    
    // +------------------- CHARTS SECTION -------------------+
    forecasted_data.removeDate('LTM').renderChart({
      start_date: nextYear - getAssumption('HISTORICAL_YEARS'),
      keys: ['eps', 'bookValue', 'adjDividend', 'retainedEarnings'],
      properties: {
        'title': 'Historical and forecasted data',
        'currency': currency
      }
    });
	// +---------------- END OF CHARTS SECTION ---------------+
    
    // +------------------- TABLES SECTION -------------------+
    // Future Data Table
    forecasted_data.removeDate('LTM').renderTable({
      start_date: nextYear - 1,
      keys: ['beginningBookValue', 'bookValue', 'eps', '_returnOnEquity', 'adjDividend', 'retainedEarnings', 'equityCostPerShare', '_costOfEquity', 'excessReturnPerShare'],
      rows: ['Beginning Book Value', 'Ending Book Value', 'EPS available to common shareholders', '{%} Return on equity', 'Dividend', 
                'Retained earnings', 'Equity cost', '{%} Cost of equity', 'Excess return'],
      properties: {
        'title': 'Future data',
        'currency': currency + " (Per Share)",
        'column_order': 'ascending',
      }
    });
    var properties = {
      'title': 'Historical data',
      'currency': currency,
      'number_format': 'M',
      'display_averages': true,
      'column_order': 'descending',
    };
    
    if( prefDividendsRatio > sensitivity ){
      historical_computed_data.renderTable({
        start_date: nextYear - getAssumption('HISTORICAL_YEARS'),
        keys: ['netIncome', 'preferredStockDividends', 'commonIncome', 
                 'totalStockholdersEquity', '_returnOnEquity', 'dividendsPaidToCommon', 
                 '_payoutRatio', 'weightedAverageShsOut', 'eps', 'adjDividend', 'bookValue'],
        rows: ['Net income','Calculated preferred stock dividends & premiums','Net income available to common shareholders', 
                  'Total Equity', '{%} Return on equity', 'Dividends paid to common shareholders',
                  '{%} Payout ratio to Common shareholders', 'Common shares outstanding', '{PerShare} EPS available to Common shareholders',
                  '{PerShare} Dividends', '{PerShare} Book Value'],
        properties: properties,
      });
    }
    else{
      historical_computed_data.renderTable({
        start_date: nextYear - getAssumption('HISTORICAL_YEARS'),
        keys: ['netIncome', 'totalStockholdersEquity', '_returnOnEquity', 'dividendsPaidToCommon',
               '_payoutRatio', 'weightedAverageShsOut', 'eps', 'adjDividend', 'bookValue'],
        rows: ['Net income', 'Total Equity', '{%} Return on equity', 'Dividends paid',
               '{%} Payout ratio', 'Shares outstanding', '{PerShare} EPS',
               '{PerShare} Dividends', '{PerShare} Book Value'],
        properties: properties,
      });
    }
    // +---------------- END OF TABLES SECTION ---------------+
  }
  catch (error) {
    throwError(error);
  }
});

Description(`
	<h5>Simple Excess Return Model</h5>
	<p>Used to estimate the value of companies that have reached maturity and earn stable excess returns with little to no high growth chance. Excess Return models are better suited to calculate the intrinsic value of a financial company than an enterprise valuation model (such as the Discounted Free Cash Flow Model).</p>
	<p class='text-center'>Read more: <a href='https://github.com/DiscountingCashFlows/Documentation/blob/main/models-documentation/excess-return-models.md#simple-excess-return-model-source-code' target='_blank'><i class="fab fa-github"></i> GitHub Documentation</a></p>
`,
  {
    _DISCOUNT_RATE: [
      '{Equation} \\text{Discount Rate} = \\text{Equity Weight} * \\text{Cost of Equity} + \\text{Debt Weight} * \\text{Cost of Debt} * (1 - \\text{Tax Rate})',
      '{Paragraph} Calculated using Weighted Average Cost of Capital (WACC) formula. It represents a firm’s average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt.',
      '{Link} https://www.investopedia.com/terms/w/wacc.asp',
      
      '{Title} Cost of Equity',
      '{Equation} \\text{Cost of Equity} = \\text{Risk Free Rate} + \\text{Beta} * \\text{Market Premium}',
      '{Paragraph} The cost of equity is the theoretical rate of return that an equity investment should generate. It is calculated using the CAPM formula.',
      '{Link} https://www.investopedia.com/terms/c/costofequity.asp#mntl-sc-block_1-0-20',
      
      '{Title} Cost of Debt',
      '{Equation} \\text{Cost of Debt} = \\frac{\\text{Interest Expense}}{\\text{Total Debt}}',
      '{Paragraph} The cost of debt is the effective rate that a company pays on its debt, such as bonds and loans.',
      '{Link} https://www.investopedia.com/terms/c/costofdebt.asp',
      
      '{Title} Equity & Debt Weights',
      '{Equation} \\text{Debt Weight} = \\frac{\\text{Total Debt}}{\\text{Market Capitalization} + \\text{Total Debt}} = 1 - \\text{Equity Weight}',
      '{Paragraph} The Equity Weight represents the proportion of equity-based financing (Market Capitalization), while the Debt Weight represents the proportion of debt-based financing (Total Debt).',
      
      '{Title} Tax Rate',
      '{Equation} \\text{Tax Rate} = \\frac{\\text{Income Tax Expense}}{\\text{Income Before Tax}}',
      '{Paragraph} The overall tax rate paid by the company on its earned income.',
    ],
    _GROWTH_IN_PERPETUITY: 'The rate at which the company\'s free cash flow is assumed to grow in perpetuity. By default, this is equal to the yield of the U.S. 10 Year Treasury Bond.',
    _OPERATING_CASH_FLOW_MARGIN: [
      '{Equation} \\text{Projected Operating Cash Flow} = \\text{Projected Revenue} * \\text{Operating Cash Flow Margin}',
      'The margin used to project future Operating Cash Flow as a % from future Revenue.',
    ],
    _CAPITAL_EXPENDITURE_MARGIN: [
      '{Equation} \\text{Projected Free Cash Flow} = \\text{Projected Operating Cash Flow} - \\text{Projected Revenue} * \\text{Capital Expedinture Margin}',
      'The margin used to project future Capital Expedinture as a % from future Revenue, which is then used to calculate the Free Cash Flow.',
    ],	
    HISTORICAL_YEARS: 'Number of historical years used to calculate historical averages.',
    REVENUE_REGRESSION_SLOPE: `Future revenues are projected using a linear regression curve of past revenues.
      Set the slope:
      '>1' for a steeper revenue regression curve
      '0' for flat
      '<0' for inverse slope`,
    _RISK_FREE_RATE: 'The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.'+
    ' By default, it is equal to the current yield of the U.S. 10 Year Treasury Bond.',
    _MARKET_PREMIUM: 'Market risk premium represents the excess returns over the risk-free rate that investors expect for taking on the incremental risks connected to the equities market.',
    BETA: 'Beta is a value that measures the price fluctuations (volatility) of a stock with respect to fluctuations in the overall stock market.',
  });

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