Equity – Valuation


Equity valuation process (CFA Level II Suggested Reading)

  • Valuation - definition and uses
  • Alpha - definition and calculation
  • Contrasting quantitative and qualitative factors in the valuation process
  • The importance of the quality of inputs
  • The importance of financial statement notes and other disclosures
  • Going concern assumptions
  • Contrasting absolute and relative valuation methods
  • The role of ownership perspective in the valuation process

Discounted dividend valuation (CFA Level II Suggested Reading)

  • Valuation - definition and uses
  • Alpha - definition and calculation
  • Contrasting quantitative and qualitative factors in the valuation process
  • The importance of the quality of inputs
  • The importance of financial statement notes and other disclosures
  • Going concern assumptions
  • Contrasting absolute and relative valuation methods
  • The role of ownership perspective in the valuation process

Free cash flow valuation (CFA Level II Suggested Reading)

  • Various definitions of cash flows, including free cash flow to firm (FCFF) and free cash flow to equity (FCFE)
  • Stock valuation using single-stage, two-stage, and three-stage FCFF and FCFE models
  • Strengths and limitations of various cash flow models
  • Adjustments required to net income, EBIT, EBITDA, and CFO to calculate FCFF and FCFE
  • Impact of dividends, share repurchases, share issues, and changes in leverage on FCFF and FCFE
  • Sensitivity analysis in FCFF and FCFE valuations
  • Approaches for calculating the terminal value
  • Application of FCFE model compare to dividend discount models

Residual income valuation (CFA Level II Suggested Reading)

  • The residual income model
  • Definition and calculation of residual income
  • Calculation of future values of residual income
  • Calculation of intrinsic value of a share of common stock using the residual income model
  • Accounting issues in applying residual income models
  • Calculation of implied growth rate in residual income
  • Common assumptions regarding continuing residual income
  • Strengths and weaknesses of the residual income model
  • Relationship of the residual income model to other equity valuation models

Price multiples valuation (CFA Level II Suggested Reading)

  • The use of price multiples
  • Price to earnings, price to book value, price to sales and price to cash flow
  • Enterprise value to EBITDA
  • Dividend yield
  • Cross-border valuation comparisons
  • Momentum indicators

Equity analysis

  • Equity analysis at the market, industry and individual stock level
  • Appropriate allocation to stocks in an investor's portfolio
  • Selecting the industry sectors that will outperform and under perform in the future
  • Spotting stocks that are undervalued
  • Drivers of value in the stock markets

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