Equity Valuation: Applications and Process

Question 1

Expression to explain sources of percieved mispricing

Answer 1

Ve - P = (V-P) + (Ve-V)

1. Ve: Estimated value
2. P: Market price
3. V: Intrinsic value

Question 2

5-Steps of the Valuation Process

Answer 2

1. Understanding the business
2. Forecasting company performance
3. Selecting appropriate valuation model
4. Convert forecasts to a valuation
5. Apply valuation conclusions (make a recommendation)

Question 3

Types of Valuation Analysis

Answer 3

1. Absolute valuation: NPV of dividends, FCFE, FCFF, Etc. (or valuation of assets like a lumber company)
2. Relative valuation model
3. Component valuation: Sum of the parts (can lead to a conglomerate discount)