Introduction to Equity Valuation
INTRODUCTION TO EQUITY VALUATION
Equity shares can be described more easily than fixed income securities. However, they are more difficult to analyse. Fixed income securities typically have a limited life and a well-defined cash flow stream. Equity shares have neither. While the basic principles of valuation are the same for fixed income securities as well as equity shares, the factors of growth and risk create greater complexity in the case of equity shares . As our discussion of market efficiency suggested, identifying mispriced securities is not easy. Yet there are enough chinks in the efficient market hypothesis and hence the search for mispriced securities cannot be dismissed out of hand. Moreover, remember that is the ongoing search for mispriced securities by any army of equity analysts that contributes to a high degree of market efficiency.
Equity analysts employ two kinds of analysis. They are as follows : ➢ Fundamental Analysis ➢ Technical Analysis
Fundamental analysts assess the fair market value of equity shares by examining the assets, earnings prospects, cash flow projections, and dividend potential. Fundamental analysts differ from technical analysts who essentially rely on price and volume trends and other market indicators to identify trading opportunities.
Equity Valuation : Equity valuation has different models .They are as follows .
Balance Sheet Valuation : Balance sheet of the firm to get a handle on some valuation measures . The three measures derived from the balance sheet are as follows : ▪ Book Value ▪ Liquidation Value ▪ Replacement Cost Dividend Discount Model :In Dividend discount model the dividends are paid annually and the first dividend is received one year after the equity share is bought. ▪ Single –period Valuation Model ▪ Expected Rate of Return ▪ Multi –period Valuation Model ▪ Zero Growth Model ▪ Constant
Equity shares can be described more easily than fixed income securities. However, they are more difficult to analyse. Fixed income securities typically have a limited life and a well-defined cash flow stream. Equity shares have neither. While the basic principles of valuation are the same for fixed income securities as well as equity shares, the factors of growth and risk create greater complexity in the case of equity shares . As our discussion of market efficiency suggested, identifying mispriced securities is not easy. Yet there are enough chinks in the efficient market hypothesis and hence the search for mispriced securities cannot be dismissed out of hand. Moreover, remember that is the ongoing search for mispriced securities by any army of equity analysts that contributes to a high degree of market efficiency.
Equity analysts employ two kinds of analysis. They are as follows : ➢ Fundamental Analysis ➢ Technical Analysis
Fundamental analysts assess the fair market value of equity shares by examining the assets, earnings prospects, cash flow projections, and dividend potential. Fundamental analysts differ from technical analysts who essentially rely on price and volume trends and other market indicators to identify trading opportunities.
Equity Valuation : Equity valuation has different models .They are as follows .
Balance Sheet Valuation : Balance sheet of the firm to get a handle on some valuation measures . The three measures derived from the balance sheet are as follows : ▪ Book Value ▪ Liquidation Value ▪ Replacement Cost Dividend Discount Model :In Dividend discount model the dividends are paid annually and the first dividend is received one year after the equity share is bought. ▪ Single –period Valuation Model ▪ Expected Rate of Return ▪ Multi –period Valuation Model ▪ Zero Growth Model ▪ Constant