Equity Asset Valuation, Second Edition

CHAPTER 1

EQUITY VALUATION: APPLICATIONS AND PROCESSES

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following :

• Define valuation and intrinsic value and explain two possible sources of perceived mispricing.

• Explain the going-concern assumption, contrast a going concern to a liquidation value concept of value, and identify the definition of value most relevant to public company valuation.

• List and discuss the uses of equity valuation.

• Explain the elements of industry and competitive analysis and the importance of evaluating the quality of financial statement information.

• Contrast absolute and relative valuation models and describe examples of each type of model.

• Illustrate the broad criteria for choosing an appropriate approach for valuing a particular company.

1. INTRODUCTION

Every day, thousands of participants in the investment profession—investors, portfolio managers, regulators, researchers—face a common and often perplexing question: What is the value of a particular asset? The answers to this question usually determine success or failure in achieving investment objectives. For one group of those participants—equity analysts—the question and its potential answers are particularly critical, because determining the value of an ownership stake is at the heart of their professional activities and decisions. Valuation is the estimation of an asset’s value based on variables perceived to be related to future investment returns, on comparisons ...