About Me
Chartered Financial Analyst (CFA)
1 Ethical and Professional Standards
1-1 Code of Ethics
1-2 Standards of Professional Conduct
1-3 Guidance for Standards I-VII
1-4 Introduction to the Global Investment Performance Standards (GIPS)
1-5 Application of the Code and Standards
2 Quantitative Methods
2-1 Time Value of Money
2-2 Discounted Cash Flow Applications
2-3 Statistical Concepts and Market Returns
2-4 Probability Concepts
2-5 Common Probability Distributions
2-6 Sampling and Estimation
2-7 Hypothesis Testing
2-8 Technical Analysis
3 Economics
3-1 Topics in Demand and Supply Analysis
3-2 The Firm and Market Structures
3-3 Aggregate Output, Prices, and Economic Growth
3-4 Understanding Business Cycles
3-5 Monetary and Fiscal Policy
3-6 International Trade and Capital Flows
3-7 Currency Exchange Rates
4 Financial Statement Analysis
4-1 Financial Reporting Mechanism
4-2 Income Statements, Balance Sheets, and Cash Flow Statements
4-3 Financial Reporting Standards
4-4 Analysis of Financial Statements
4-5 Inventories
4-6 Long-Lived Assets
4-7 Income Taxes
4-8 Non-Current (Long-term) Liabilities
4-9 Financial Reporting Quality
4-10 Financial Analysis Techniques
4-11 Evaluating Financial Reporting Quality
5 Corporate Finance
5-1 Capital Budgeting
5-2 Cost of Capital
5-3 Measures of Leverage
5-4 Dividends and Share Repurchases
5-5 Corporate Governance and ESG Considerations
6 Equity Investments
6-1 Market Organization and Structure
6-2 Security Market Indices
6-3 Overview of Equity Securities
6-4 Industry and Company Analysis
6-5 Equity Valuation: Concepts and Basic Tools
6-6 Equity Valuation: Applications and Processes
7 Fixed Income
7-1 Fixed-Income Securities: Defining Elements
7-2 Fixed-Income Markets: Issuance, Trading, and Funding
7-3 Introduction to the Valuation of Fixed-Income Securities
7-4 Understanding Yield Spreads
7-5 Fundamentals of Credit Analysis
8 Derivatives
8-1 Derivative Markets and Instruments
8-2 Pricing and Valuation of Forward Commitments
8-3 Valuation of Contingent Claims
9 Alternative Investments
9-1 Alternative Investments Overview
9-2 Risk Management Applications of Alternative Investments
9-3 Private Equity Investments
9-4 Real Estate Investments
9-5 Commodities
9-6 Infrastructure Investments
9-7 Hedge Funds
10 Portfolio Management and Wealth Planning
10-1 Portfolio Management: An Overview
10-2 Investment Policy Statement (IPS)
10-3 Asset Allocation
10-4 Basics of Portfolio Planning and Construction
10-5 Risk Management in the Portfolio Context
10-6 Monitoring and Rebalancing
10-7 Global Investment Performance Standards (GIPS)
10-8 Introduction to the Wealth Management Process
6.5 Equity Valuation: Concepts and Basic Tools Explained

6.5 Equity Valuation: Concepts and Basic Tools - 6.5 Equity Valuation: Concepts and Basic Tools Explained

Key Concepts

Intrinsic Value

Intrinsic Value is the true worth of a stock based on its underlying financials, growth prospects, and risk factors. It is calculated using various valuation models and is considered the fair value of the stock. Investors aim to buy stocks below their intrinsic value to achieve potential gains.

Example: A company has projected cash flows of $10 million annually for the next five years. Using a DCF model with a discount rate of 10%, the intrinsic value of the stock is calculated to be $40. If the current market price is $35, the stock is considered undervalued.

Market Value

Market Value is the current price at which a stock is trading in the market. It is influenced by supply and demand dynamics, investor sentiment, and broader market conditions. Market value can fluctuate frequently and may not always reflect the intrinsic value of the stock.

Example: A stock is trading at $50 per share on the stock exchange. This $50 is the market value, representing the collective opinion of buyers and sellers at that moment.

Discounted Cash Flow (DCF) Analysis

DCF Analysis is a method used to estimate the value of an investment based on its expected future cash flows. The future cash flows are discounted to their present value using a required rate of return. The sum of these discounted cash flows represents the intrinsic value of the stock.

Example: A company expects to generate $1 million in cash flow next year, $1.2 million in the second year, and $1.5 million in the third year. Using a discount rate of 8%, the present value of these cash flows is calculated, and the sum gives the intrinsic value of the stock.

Price-to-Earnings (P/E) Ratio

The P/E Ratio is a valuation metric that compares a company's current stock price to its earnings per share (EPS). It indicates how much investors are willing to pay for each dollar of earnings. A higher P/E ratio suggests higher growth expectations, while a lower P/E ratio may indicate undervaluation.

Example: A company has a stock price of $50 and earnings per share of $5. The P/E ratio is 10 ($50/$5). If the industry average P/E ratio is 15, this company may be considered undervalued relative to its peers.

Dividend Discount Model (DDM)

The DDM is a method used to value a stock based on the present value of its expected future dividends. It assumes that the value of a stock is the sum of all its future dividend payments, discounted to the present. The model is particularly useful for companies that pay regular dividends.

Example: A company pays an annual dividend of $2 per share and is expected to grow at a rate of 5% annually. Using a required rate of return of 10%, the present value of these future dividends is calculated, giving the intrinsic value of the stock.

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