Equity Markets and Portfolio Analysis

CHAPTER 12 Applied Fundamental Analysis

Introduction

In the last chapter, we examined how such factors as a firm's investments, choice of financing, and capital structure decisions determine the value of its stock. In this chapter, we extend our examination of fundamental analysis by looking at different quantitative approaches that are used to estimate the intrinsic value of a stock. The two most common approaches used by fundamentalists to value stocks are the discounted cash flow (DCF) method and the multiplier approach. The DCF approach is the valuation approach we discussed in preceding chapters. The important variables to estimate in the DCF are earnings per share (EPS) next year, the growth rate in EPS, the dividend-payout ratio, ...