CHAPTER 10

EQUITY VALUATION: CONCEPTS AND BASIC TOOLS

LEARNING OUTCOMES

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

- Evaluate whether a security, given its current market price and a value estimate, is overvalued, fairly valued, or undervalued by the market.
- Describe major categories of equity valuation models.
- Explain the rationale for using present value of cash flow models to value equity and describe the dividend discount and free cash flow to equity models.
- Calculate the intrinsic value of a noncallable, nonconvertible preferred stock.
- 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.
- Identify companies for which the constant growth or a multistage dividend discount model is appropriate.
- Explain the rationale for using price multiples to value equity and distinguish between multiples based on comparables versus multiples based on fundamentals.
- 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.
- Explain the use of enterprise value multiples in equity valuation and demonstrate the use of enterprise value multiples to estimate equity value.
- Explain asset-based valuation models and demonstrate the use of asset-based models to calculate equity ...