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The Intelligent Option Investor: Applying Value Investing to the World of Options by Erik Kobayashi-Solomon

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Chapter 4

THE GOLDEN RULE OF VALUATION

Commit the following definition to memory:

       The value of an asset is the sum of the cash flows it creates on behalf of its owners over its economic life.

Contrary to popular opinion, valuation is easy. One does not need a master’s degree in accounting or to be an expert in financial statement analysis to competently value a company and estimate a fair value range for a stock. The only thing a person needs is to internalize the preceding sentence and understand the handful of factors that affect the cash flows of a firm over time.

This chapter focuses on developing a theoretical framework using the golden rule of valuation—which you have already memorized—and looks at each part of that simple definition ...

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