What are ways for valuing stocks? Do you believe these valuation methods could actually lead the average investor to make a profit buying and selling stock? Why or Why not?
Key concepts relating to
Approaches to Business/Stock valuation:
Free cash flow or WACC approach gives the firm's value of assets or stock.
Value of stock = Value of firm - Value of Debt
(For various valuation models see excel file (Valuation theory- attached.)
It is a better method because:
Capitalization of expected income
Intrinsic value based on the discounted value of the expected stream of cash flows
But other methods should also be used such as dividend discount model AND PE ratio as it will act as complimentary model.
P/E multiplier remains popular for its ease in use and the objections to the dividend discount model because investor tend to focus on the capital gain.
P/E ratios are a useful indicator and tool when performing valuation and comparing firms. List three factors that should be considered or adjusted for when comparing P/E ratios among different firms.
Price Earning ratios = Market price of equity per share/Earnings per share. The relationship between the market price of a share of stock and the stock's current earnings per share is often stated in terms of a price-earnings ratio. The price-earnings ratio is widely used by investors as a general guideline in gauging stock values. If the ratio is unusually high or low for a firm in relation to its industry, an analyst is likely to suspect that the stock is overvalued or ...
This solution provides explanations for stock valuation methods.