Page 135 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes (c) Collaboration agreements
(d) Product range
(e) Future plans of expansion/diversification
(f) R&D

(g) Market standing – competition and market share
(h) Corporate social responsibility
(i) Industrial relations scenario
(j) Corporate image etc.

Besides these internal factors, the external environment related to the company survival
and image:
(a) Statutory controls

(b) Government policy
(c) Industry life cycle stage
(d) Business cycle stage
(e) Environmentalism

(f) Consumerism, etc.
2. Financial Aspects: Financial analysts interested in making investments in equality shares
of a company will be concerned with the prospects of rise in value of the firm.

Asset value vs. Earnings value: The asset value of a security is determined by estimating
the liquidating value of the firm, deducting the claims of firm’s creditors and allocating
the remaining net asset value of the firm over the outstanding shares of stock. The asset
value is usually estimated by consultation with:
A specialist who appraises asset values and/or

An accountant who gives book value of the firm.
This method is suitable only for companies heading towards bankruptcy. For them, the
firm’s income and dividends will be declining and discontinuous. Hence, they will have
negligible value. On the other hand, for going concerns, the intrinsic value far exceeds the
value of the firm’s physical assets. There is a definite lack of relationship between book
value and real value, in the case of prosperous firms.
Therefore, investment analysis focus their attention on the trends of earnings and the
related factors like dividends, bonus issues, rights shares, and appreciation of the market
value of the share. It is believed that the appropriate indices for a company’s performance
are Market price Per Share (MPS) and Earnings Per Share (EPS).

4.3.2 Fundamental Analyst’s Model

The true economic value or intrinsic value of a share of common stock. Like the value of bond or
other assets it is equal to the present value of all cash flows from the asset.

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