Essentials of Investments: Chapter 13 - Equity Valuation presents about Fundamental Analysis, Models of Equity Valuation, Valuation by Comparables, Limitations of Book Value, Intrinsic Value vs. Market Price. | CHAPTER 13 Equity Valuation INVESTMENTS | BODIE, KANE, MARCUS McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 18-2 Valuation: Fundamental Analysis • Fundamental analysis models a company’s value by assessing its current and future profitability. • The purpose of fundamental analysis is to identify mispriced stocks relative to some measure of “true” value derived from financial data. INVESTMENTS | BODIE, KANE, MARCUS 18-3 Models of Equity Valuation • • • • Balance Sheet Models Dividend Discount Models (DDM) Price/Earnings Ratios Free Cash Flow Models INVESTMENTS | BODIE, KANE, MARCUS 18-4 Valuation by Comparables • Compare valuation ratios of firm to industry averages. • Ratios like price/sales are useful for valuing start-ups that have yet to generate positive earnings. INVESTMENTS | BODIE, KANE, MARCUS 18-5 Limitations of Book Value • Book values are based on historical cost, not actual market values. • It is possible, but uncommon, for market value to be less than book value. • “Floor” or minimum value is the liquidation value per share. • Tobin’s q is the ratio of market price to replacement cost. INVESTMENTS | BODIE, KANE, .
