Page 111 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes investors, whereas corporate finance tends to take an inside perspective such as that of a
corporate financial manager.
The equity value of a firm is simply its market capitalization, that is, market price per
share multiplied by the number of outstanding shares.
Two types of approaches to valuation are discounted cash flow methods and financial
ratio methods.
The “cash flow to equity” approach to valuation directly discounts the firm’s cash flow to
the equity owners.

Free cash flow (FCF) is cash flow available for distribution among all the securities holders
of an organization.
In general, each project’s value will be estimated using a discounted cash flow (DCF)
valuation, and the opportunity with the highest value, as measured by the resultant net
present value (NPV) will be selected.

This requires estimating the size and timing of all of the incremental cash flows resulting
from the project.
Any outstanding warrants must be considered when valuing the equity of the firm.

Buyback is reverse of issue of shares by a company where it offers to take back its shares
owned by the investors at a specified price; this offer can be binding or optional to the
investors.
Goodwill is considered to be one of the largest intangible assets, the value of which
companies want to reflect correctly in their financial statements.

Accounting for this asset, poses many challenges for accountants, as it is an unidentifiable
intangible asset.

3.11 Keywords

Amortisation: The process of increasing, or accounting for, an amount over a period of time.

Asset: Economic resources owned by business or company.
Intrinsic Value: The difference between the exercise (strike) price and the underlying stock
price.

Warrants: Securities that entitles the holder to buy stock of the company that issued it at a
specified price, which is usually higher than the stock price at time of issue.

3.12 Self Assessment

State whether the following statements are true or false:

1. Security analysis comprises of an examination and distribution of the various factors
affecting the value of a security.
2. The enterprise value is the value of all the assets of the firm.

3. A warrant is a security that entitles the holder to buy stock of the company that issued it at
a specified price, which is usually higher than the stock price at time of issue.
4. Security analysis tends to take the perspective such as that of a corporate financial manager.

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