This study session introduces essential equity valuation concepts. The various defi-
nitions of value and the application of equity valuation techniques to solve everyday
problems are first discussed. A five-step equity valuation process is then described with
the three main categories of equity valuation models (absolute, relative, total entity)
presented in step three. Key return measures including the equity risk premium and
derivation of the equity required return using various models (CAPM, multifactor,
build up) conclude the session.
Reading 26 Equity Valuation: Applications and Processes
Reading 27 Return Concepts
STUDY SESSION 10 Equity Valuation (2)
This study session focuses on financial modeling including the development of
forecast model inputs using available industry and corporate information. Approaches
for analyzing key balance sheet, income, and cash flow statement items are presented.
Other factors affecting financial forecasts such as competition, inflation, deflation, and
technology are considered. An example using pro forma financial statements to build
a financial model is shown. The session ends with coverage of discounted cash flow
(DCF) valuation models and an emphasis on the dividend discount model (DDM).
Reading 28 Industry and Company Analysis
Reading 29 Discounted Dividend Valuation
STUDY SESSION 11 Equity Valuation (3)
This study session presents additional valuation methods for estimating a company’s
intrinsic value. The free cash flow model, which takes available cash flows for distribu-
tion as the basis for valuation, is presented as an alternative to the dividend discount
model, which uses actual dividends distributed. Relative valuation, using price and
enterprise value multiples and which includes the comparables and forecasted funda-
mentals methods, comes next. Residual income valuation, useful when dividends or
cash flows are minimal or volatile, or when difficulties exist in forecasting long-term
terminal values, follows. The main approaches for valuing private company equity
(income, market, asset based) conclude the session.
Reading 30 Free Cash Flow Valuation
Reading 31 Market-Based Valuation: Price and Enterprise Value Multiples