Wednesday, 8 January 2020

Unit 5: Equity Valuation Models

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Unit 5: Equity Valuation Models

Determining the total value of a company involves more than reviewing assets and revenue figures.

An equity valuation takes several financial indicators into account.

These include both tangible and intangible assets, and provide prospective investors, creditors or shareholders with an accurate perspective of the true value of a company at any given time.

Security Analysis and Portfolio Management Notes Equity valuations are conducted to measure the value of a company given its current assets and position in the market.

These data points are valuable for shareholders and prospective investors who want to find out if the company is performing well, and what to expect with their stocks or investments in the near future.

Equity-valuation formulas include the Dividend Discount Model, Free Cash Flow Model and the Price-Earnings Ratio.

The total equity of a company is the sum of both tangible assets and intangible qualities.

Tangible assets include working capital, cash, inventory and shareholder equity.

Intangible qualities, or intangible "assets," may include brand potential, trademarks and stock valuations.

Performance indicators include the price/earnings ratio, dividend yield, and the Earnings before Interest, Depreciation and Amortization (EBIDA).

The valuation may also take the firm's enterprise value (EV) into account; this is calculated by combining the net debt per share with the price per share.


Amortization: The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time.

Such payments must be sufficient to cover both principal and interest.

Asset: Any item of economic value owned by an individual or corporation, especially that which could be converted to cash.

Depreciation: A non-cash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence.




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