Reading 41. Equity Valuation: Concepts and Basic Tools
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Learning Outcome Statements
|Reading 41. Equity Valuation: Concepts and Basic Tools|
|1. Estimated Value and Market Price|
a. evaluate whether a security, given its current market price and a value estimate, is overvalued, fairly valued, or undervalued by the market;
b. describe major categories of equity valuation models;
|2. Present Value Models: The Dividend Discount Model|
c. explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models;
e. calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate;
f. identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate;
|3. Preferred Stock Valuation|
d. calculate the intrinsic value of a non-callable, non-convertible preferred stock;
|4. Multiplier Models|
g. explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables;
h. calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value;
|5. Enterprise Value|
i. describe enterprise value multiples and their use in estimating equity value;
|6. Asset-Based Valuation|
j. describe asset-based valuation models and their use in estimating equity value;
k. explain advantages and disadvantages of each category of valuation model.