Multistage Dividend Discount Model
The Gordon (constant) growth dividend discount model is particularly useful for valuing the equity of dividend-paying companies that are insensitive to the business cycle and in a mature growth phase. On the other hand, multistage models are often used to…
Using Price Multiples to Value Equity
The use of price multipliers to earnings, book value, and sales have all shown to have significant predictive value in determining relative future returns, implying that price multiples can be an effective tool for the valuation of companies. In addition,…
Price Multiples
The concept of price multiples refers to ratios that compare a company’s share price with a financial metric, allowing for an assessment of the stock’s relative value. These ratios are commonly used by practitioners for screening purposes, identifying stocks for…
Enterprise Value Multiples
Enterprise value (EV), often viewed as the cost of a takeover, is most frequently determined as market capitalization plus the market value of preferred stock plus the market value of debt minus cash equivalents and short-term investments. EV/EBITDA EBITDA (earnings before interest,…
Asset-based Valuation Models
An asset-based valuation of a company uses estimates of the market or fair value of the company’s assets and liabilities and, thus, is most appropriate for companies with a high proportion of current assets and current liabilities and few/insignificant intangible…
Categories of Valuation Model
Free Cash Flow to Equity (FCFE) Model Advantages: aims to calculate a company’s capacity to pay future dividends, going beyond simply discounting expected dividends. This approach may provide a more useful valuation, especially when the company does not pay dividends…
The Main Functions of the Financial System
Achievement of Purposes People use the financial system for various reasons, which can be broken down into six main purposes. However, regardless of the purpose, the financial system is more efficient when transactions are performed in liquid markets. 1. Saving…
Classifications of Assets and Markets
Assets Securities: includes both debt and equity securities. Securities may be further classified as public or private securities, depending on if they are traded on a public exchange. Currencies: monies issued by national monetary authorities. Contracts: agreements to trade other…
Assets Traded in Organized Markets
Fixed Income Fixed income investments include promises to repay borrowed money and a variety of other instruments with payment schedules. People, companies, and governments create fixed-income instruments when they borrow money. While there is no consensus definition on the exact…
Types of Financial Intermediaries
Financial intermediaries help entities achieve their goals by providing products and services that help connect buyers and sellers. The key financial intermediaries are defined below. Brokers: Agents who fill orders for their clients, helping reduce their client’s transaction costs by…
