Analysis of Equity investments: Valuation
Contents
The equity valuation process.
Discounted dividend valuation.
Free cash flow valuation.
Market-Based Valuation: Price Multiples.
Residual income Valuation.
1. The equity valuation process
1.1. Introduction.
1.2. The scope of equity valuation.
1.3. Valuation concepts and models.
1.4. Analyst roles and responsibilities.
1.5. Effective research report.
1.6. Summary.
Valuation - is an estimation of an assets value, based on either on variables related to future investments returns or on comparison with similar assets.
Analyst does;
Selects
stocks. (common
share in
Inferring or extracting market expectations. Fundamentals. Free cash flow models.
Evaluating corporate events. (Mergers, Acquisitions, divestitures, spin-offs, managements buy-outs MBOs, leveraged recapitalizations).
Communicating with analysts and shareholders
Appraising private businesses. (IPOs, marketability discounts)
The investment process has three steps: planning, execution, feedback (evaluating results, monitoring and rebalancing).
Planning - specification of investments objectives and constraints, elaboration of investment strategy, active investment strategy, differential expectation)
Execution - portfolio selection/composition decision.
1.3. Valuation concepts and models
Valuation process:
Understanding the business (industry analysis, corporate strategy.
Forecasting company performance.
Selecting appropriate valuation model.
Converting forecasts to valuations.
Making the investment decision.
UNDERSTANDING THE BUSINESS. Top-down investing and bottom-up investing styles.
FINANCIAL FORECASTING.
Financial strength: EBITDA/interest expense
Debt paying ability: Debt/EBITDA
What is active investments strategies?
What is pro-forma analysis?
What is bill-and-hold sales?
What is high pension discount rate?
What is a special purpose entity?
Positions:
Investments bankers.
Corporate analysts.
Investments analysts.
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