How to value a firm? - ANS-Estimate expected future cash flows
Estimate cost of capital (r).
International macro - Domestic macro - Industry -
... [Show More] Firm.
Security analysis includes: - ANS-1) Equity valuation:
-One measure to value a company
-Uses models such as the dividend discount model (DDM) and price-to-earnings (P/E)
model.
2)Financial statement analysis:
-Analysis of accounting data.
3)Macroeconomic and industry analysis:
-The aggregate economy, including international economy and the firm's position within
the industry.
-To evaluate the business environment in which the firm operates.
Why is stock valuation important? - ANS-Assessing investment opportunities:
-If the market is undervaluing a given stock - buying signal
-If the market is overvaluing a stock - selling signal
What is fundamental analysis? - ANS--If you are a security analyst, in order to
determine a proper price for a firm's stock, you must forecast the dividends and
earnings that can be expected from the firm.
-Fundamental analysis is the analysis of the determinants of value for a firm.
-Ultimately, the business success of the firm determines the dividends it can pay
shareholders and the price it will command in the stock market.
-Fundamental analysts are those analysts who use information concerning the current
and prospective profitability of a company to assess its fair market value. Distinguish
this from technical analysts in last week's lecture.
Why study fundamental analysis? - ANS-Different concerned parties have different
purposes of analysing financial statements:
-Managers/directors
-Investors
-Creditors
-Debtors
-Government
-Labour union & employees
-Lawyers
-External/internal auditors
There is a relationship between stock prices and accounting numbers. This relationship
is helpful for valuation of equity or assets of a company.
Fundamental stock analysis: models of equity valuation - ANS-Estimating the intrinsic
value for firm and growth rates and opportunities. Basic types of models:
-Balance sheet model
-Dividend discount model (DDM)
-P/E model
Stock valuation models - ANS-Value of a stock is based on the present value of the
cash flows received from holding it. Discounted cash flow (DCF) model (Inputs to: cash
flows; growth; discount rate). The return from a stock is based on (recall holding period
return):
-The dividend (Dt)
-The price from selling the stock (Pt)
Intrinsic value - ANS-The worth of a firm that is justified by the information about its
forecasted earnings.
Market value - ANS-represents the present value of investors' expectation of a firms
future earnings. could be mis-priced under the effect of misinterpretation of information
and bubbles.
Intrinsic value vs market value - ANS--intrinsic value > market value, buy
-intrinsic value [Show Less]