Question

In: Finance

1. Briefly write about the stock valuation methods as discussed in the chapter.

Expert Solution

Every investor want to earn maximum return on their investment for the same he must have skill to stock valuation.

Followings are the methods used for stock valuation.

1.Discounted Cash Flow Model- It is one of the most important valuation method which is used for stock valuation.

In this method the value of stock is calculated by discounting company's cash flow to its present value.

This method is applicable where distribution of dividend is unknown or unpredictable.

Net present value method,profitablity index method,intrenal rate of returm methods etc are parts of discounted cash flow model.

2.Dividend Discount Model -This model is one of the basic technique of stock valuation.

This model is based on the assumption that companies dividend represent the cash flow for shareholders.

That means the companies stock price is equal to present value of companies future dividend.

This method is only applicable when company distributes dividend regularly.

3.Asset Based valuation-Market value of Assets-Liablities.

We have to calculte Adjusted book value and Liquidation value.

Adjusted book value=updated assets and liablities in balance sheet which reflect current market condition,

Liquidation value=updated value of assets and liablities which reflect current position of company +gains/losses during a liquidation.

4.Comparable valuation-This method of valuation is used when a company make valuation with a company in similar field.

Here similar fields mean.

A.Similar Industry

B.Similar Size

C.Similar Geography

D.Similar Financial Position

Under this method we calculate five ratios

A.Price Earning Ratio

B.Price to Book Ratio

C.Price to Sales Ratio

D.Price to Cash Flow Ratio

E.Enterprise value to Earning before intertest ,taxes,depreciation and amortization.

jeff jeffy answered 1 year ago

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