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
6.6 Equity Valuation: Applications and Processes Explained

6.6 Equity Valuation: Applications and Processes - 6.6 Equity Valuation: Applications and Processes Explained

Key Concepts

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 process involves forecasting future cash flows, discounting them to their present value using a required rate of return, and summing these values to arrive at the intrinsic value of the investment.

Example: A company expects to generate $10 million in free cash flow next year and anticipates a 5% growth rate in cash flows annually. If the required rate of return is 10%, the present value of these cash flows can be calculated to determine the company's intrinsic value.

Comparable Company Analysis

Comparable Company Analysis involves comparing a company to similar companies in the same industry to determine its relative value. This method uses financial ratios and multiples (such as Price-to-Earnings, Price-to-Sales, and Enterprise Value-to-EBITDA) to assess the company's valuation.

Example: A tech startup is compared to publicly traded tech companies with similar revenue and growth rates. By analyzing the average P/E ratio of these comparable companies, the startup's valuation can be estimated based on its expected earnings.

Precedent Transactions

Precedent Transactions involve analyzing historical mergers and acquisitions in the same industry to determine a company's value. This method looks at the prices paid for similar companies in the past and applies those multiples to the target company's financials.

Example: A pharmaceutical company is considering acquiring a biotech firm. By examining the prices paid for similar biotech firms in recent acquisitions, the pharmaceutical company can estimate a fair value for the target firm.

Dividend Discount Model (DDM)

The DDM is a method used to value a stock based on the present value of its expected future dividends. The model assumes that the value of a stock is the sum of all future dividends, discounted to their present value using a required rate of return.

Example: A company pays an annual dividend of $2 per share and is expected to grow its dividends by 3% annually. If the required rate of return is 8%, the present value of these future dividends can be calculated to determine the stock's intrinsic value.

Multiples-Based Valuation

Multiples-Based Valuation involves using financial ratios and multiples to estimate a company's value. Common multiples include Price-to-Earnings (P/E), Price-to-Sales (P/S), and Enterprise Value-to-EBITDA (EV/EBITDA). This method is often used in conjunction with other valuation techniques.

Example: A retail company has earnings of $50 million and a P/E ratio of 15. By multiplying the earnings by the P/E ratio, the company's market value can be estimated at $750 million.

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