Questions and Answers
An absolute valuation model estimates intrinsic value based on past earnings, cash flows, and risk.
False
Valuation models should only be selected based on the company's dividend payouts.
False
Top-down forecasting starts with individual company analysis and then moves to industry forecasts and macroeconomic forecasts.
False
Understanding the business involves analyzing only financial statements and not other company disclosures.
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Choosing a valuation approach that is consistent with the characteristics of the company being valued is not important.
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Absolute Valuation Models estimate intrinsic value based on future earnings, cash flows, and risk.
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Forecasting company performance usually involves a bottom-up approach from industry forecasts to macroeconomic forecasts.
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Selecting the appropriate valuation approach does not depend on the availability and quality of the data.
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Analysts should not consider the stability of a company's cash flows when choosing a valuation model.
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The quality of a company's financial information, especially its earnings, is not important for understanding the business.
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Study Notes
Stock Valuation Models
- Absolute Valuation Models:
- Specify an asset's intrinsic value, which can be compared with the market price
- Examples include Dividend Discount and Free Cash Flow Valuation Models
- Relative Valuation Models:
- Specify an asset's value relative to the value of another asset
- Also known as the method of comparables in equity valuation
- Involves comparison of a stock's price multiple to a benchmark price multiple
- The benchmark price multiple can be based on a similar stock or the average price multiple of a group of stocks
Contingent Claim Valuation Model
- Uses option pricing models to measure the value of assets that share option characteristics
Converting Forecasts to Valuation
- Involves judgment and two important aspects:
- Sensitivity analysis
- Situational adjustments
Applying Analytical Results
- Involves using valuation conclusions to make investment recommendations or provide opinions about transactions
- Depends on the purpose of the analysis
Analyst's Role and Responsibilities
- Sell-side analysts:
- Work at brokerage firms or independent financial vendors
- Identify and value potential acquisition targets
- Analyze financial reports for retail clients
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Description
Explore the concepts of absolute valuation models such as dividend discount and free cash flow valuation, along with relative valuation models like the method of comparables in equity valuation. This quiz covers different methods to determine an asset's intrinsic value and compare it to market prices.
