Equity Valuation Process

Summaries

Graham and Dodd

-          1934

-          Security Analysis

-          Determine value based on income statement and balance sheet

-          Earning power/ intrinsic value/ Margin of Safety

John Burr William

-          1938

-          The Theory of Investment Value

-          Value by discounting future dividends

Equity valuation is useful for:

1. Stock selection
2. Reading the market
3. Projecting the value of corporate actions
4. Fairness Opinions
5. Planning and consulting
6. Communication with investors and analysts
7. Valuation of private business
8. Portfolio management

Quantitative factors (numbers)

Qualitative factors (analysts’ subjective assessment such as confidence on company’s accounting practice)

Ex post/ Ex Ante alphas

Going-concern value: based on firm’s continue operation

Liquidation/non-going-concern value: based on the liquidation of the firms’ assets

Fair value: based on how much willing buyers and sellers can pay in an arms-length transaction

Absolute Valuation Models: E.g. DDM and asset-based models

Relative Discount Models: E.g. P/E

Other values:

Premiums for control (e.g. if use FCF to valuate, the value is higher than DDM because FCF means you have control on the company’s operations)

Discounts for lack of marketability (Just due to the fact not being publicly traded)

Discounts for lack of liquidity (Many causes including the size being too large than normal)