how can investors use common stock valuation method and interpret the subjective aspect of it.

Expert Solution

Ans. When deciding which valuation method to use to value the stock its easy to overwhelmed by the no. of valuation techniques available to the investor.

Valuation Methods typically fall into two main categories:

Absolute Valuation
Relative Valuation

Absolute Valuation

The investor attemps this model to find the intrinsic or true value of an investment based only on fundamentals. Fundamentals means you would only focus on things like dividends, cash flows, and growth rate for a single company. Valuation models fall into this category are Divided Discount Model, Discounted Cash Flow Model, Residual Income Model and Assed based Model.

Relative Valuation

This model attempted by the investor for comparing the company in question to other similar companies. This method involves calculating multiples and ratios like price to earning multiples and comparing them to the multiples of similar company.

This model is a lot easier and quicker than the absolute Valuation model that is why many investors and analysts begin ther analysis with this model.

jeff jeffy answered 6 months ago

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