Discuss the various stock valuation methods and the relevant factors that affect the valuation process.
Which factor(s) have the most bearing on stock price?
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Let us discuss certain valuation techniques:
Free cash flow or WACC approach gives the firm's value of assets or stock.
The use of the DCF techniques can be extended to value a business firm. In the valuation of a firm a financial analyst usually assumes a constant debt ratio. The firm can be valued using Free Cash Flows and WACC. (Weighted average cost of capital)
Free cash flows are the funds that can be distributed to investors after the operating costs have been deducted. Operating costs are the costs incurred while running the business and making a product or providing a service. These costs include but are not limited to: materials, labor, rent, taxes, interest, loan payments, etc. The remaining cash or Net Operating Profit after Taxes can be used to reinvest in the company, distribute to investors, or reduce debt.
As stated previously, Free Cash Flow is the remaining profit that can be used to distribute to shareholders or pay off debt. Depending on the position and goals of the business it can choose to do either or both of these activities. The difference between NOPAT and the Invested Capital is the Free Cash Flow.
Further, the analyst assumes a horizon period for analysis and calculates the horizon value at the end of the horizon period. Horizon value depends on the growth prospects of the firm after the horizon period. Thus, the value of the firm is given as follows:
The value of equity is obtained by subtracting the outstanding amount of debt from the value of the firm. The value of equity divided by the number of outstanding shares gives the equity value per share.
Value of stock = Value of firm - Value of Debt
In this we can have constant Growth Valuation ...
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