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Retail Store Management

Notes
Did u know? In the view of others, such as John Maynard Keynes, stock valuation is not a
prediction but a convention, which serves to facilitate investment and ensure that stocks
are liquid, despite being underpinned by an illiquid business and its illiquid investments.
9.1.1 Fundamental Citeria (Fair Value)

The most theoretically sound stock valuation method, called income valuation or the discounted
cash flow (DCF) method, involves discounting of the profits (dividends, earnings, or cash flows)
the stock will bring to the stockholder in the foreseeable future, and a final value on disposal.
The discounted rate normally includes a risk premium which is commonly based on the capital
asset pricing model.
In July 2010, a Delaware court ruled on appropriate inputs to use in discounted cash flow
analysis in a dispute between shareholders and a company over the proper fair value of the
stock. In this case the shareholders’ model provided value of $139 per share and the company’s
model provided $89 per share. Contested inputs included the terminal growth rate, the equity
risk premium, and beta.

9.1.2 Stock Valuation Methods

Stocks have two types of valuations. One is a value created using some type of cash flow, sales
or fundamental earnings analysis. The other value is dictated by how much an investor is
willing to pay for a particular share of stock and by how much other investors are willing to sell
a stock for (in other words, by supply and demand). Both of these values change over time as
investors change the way they analyze stocks and as they become more or less confident in the
future of stocks.
The fundamental valuation is the valuation that people use to justify stock prices. The most
common example of this type of valuation methodology is P/E ratio, which stands for Price to
Earnings Ratio. This form of valuation is based on historic ratios and statistics and aims to assign
value to a stock based on measurable attributes. This form of valuation is typically what drives
long-term stock prices.

The other way stocks are valued is based on supply and demand. The more people that want to
buy the stock, the higher its price will be. And conversely, the more people that want to sell the
stock, the lower the price will be. This form of valuation is very hard to understand or predict,
and it often drives the short-term stock market trends.

Task The fundamental valuation is the valuation that people use to justify stock prices.
What are those prices?

There are many different ways to value stocks. The key is to take each approach into account
while formulating an overall opinion of the stock. If the valuation of a company is lower or
higher than other similar stocks, then the next step would be to determine the reasons.
Earnings per Share (EPS): EPS is the net income available to common shareholders of the
company divided by the number of shares outstanding. They usually have a GAAP EPS number
(which means that it is computed using all of mutually agreed upon accounting rules) and a Pro

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