Page 167 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Equity valuations are conducted to measure the value of a company given its current
assets and position in the market.
These data points are valuable for shareholders and prospective investors who want to
find out if the company is performing well, and what to expect with their stocks or
investments in the near future.

Equity-valuation formulas include the Dividend Discount Model, Free Cash Flow Model
and the Price-Earnings Ratio.
The total equity of a company is the sum of both tangible assets and intangible qualities.

Tangible assets include working capital, cash, inventory and shareholder equity. Intangible
qualities, or intangible "assets," may include brand potential, trademarks and stock
valuations.
Performance indicators include the price/earnings ratio, dividend yield, and the Earnings
before Interest, Depreciation and Amortization (EBIDA).

The valuation may also take the firm's enterprise value (EV) into account; this is calculated
by combining the net debt per share with the price per share.

5.6 Keywords

Amortization: The gradual elimination of a liability, such as a mortgage, in regular payments
over a specified period of time. Such payments must be sufficient to cover both principal and
interest.

Asset: Any item of economic value owned by an individual or corporation, especially that
which could be converted to cash.
Depreciation: A non-cash expense that reduces the value of an asset as a result of wear and tear,
age, or obsolescence.

5.7 Self Assessment

State whether the following statements are true or false:
1. The total equity of a company is the sum of all its tangible assets.

2. Every equity valuation takes one most important financial indicator into account.
3. Any capital expenditures, defined broadly to include acquisitions, and are subtracted
from the net income.

4. Equity Cash Flows associated with Capital Expenditure Needs = (Capital Expenditures -
Depreciation)(1 - )
5. Replacement value includes not only the cost of acquiring or replicating the property, but
also all the relevant costs associated with replacement.
6. Increases in working capital increase a firm's cash flows.
7. Adjusted Book Value is also called modified book value.

8. Discounted cash flow is cash flow available for distribution among all the securities
holders of an organization.
9. Equity valuations are conducted to measure the value of a company given its current
assets and position in the market.

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