According to analysts at Morningstar, that company’s “fair value” numbers for stocks on which it reports...

According to analysts at Morningstar, that company’s “fair value” numbers for stocks on which it reports is determined primarily by…

CAGR of net earnings.

discounted cash flow analysis.

market capitalization.

Expert Solution

According to analysts at Morningstar, that company’s “fair value” numbers for stocks on which it reports is determined primarily by Discounted Cash Flow Analysis.

Analysts at Morningstar basically calculate the revenue and growth projections for the company and then arrive at forecast values for the cash flows. Thus this helps them decide how the company would perform in the future and how its income statement, balance sheet and ultimately the cash flow will pan out.

Based on the future cash flows Morningstar then uses the Cash Flow discounting by assuming certain growth rate metrics and arrives at the discounted present value of the cash flows. Thus this helps it to determine the final fair value for the stock.

All the above mentioned is part of a detailed financial excel based modeling which is done by Morningstar analysts. All the assumptions are backed by certain robust rationale after studying the company in depth. Revenue assumptions form a major part of all the calculations.

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