{"id":1964,"date":"2019-09-27T13:33:00","date_gmt":"2019-09-27T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=1964"},"modified":"2026-03-23T17:03:30","modified_gmt":"2026-03-23T17:03:30","slug":"major-categories-equity-valuation-models","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/equity\/major-categories-equity-valuation-models\/","title":{"rendered":"Major Categories of Equity Valuation Models"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Equity Valuation: Concepts and Basic Tools (2025 CFA\u00ae Level I Exam \u2013 Equity \u2013 Module 8)\",\n  \"description\": \"This CFA\u00ae Level I Equity Investments lesson covers the core concepts and tools used to value equity securities. The video explains how to assess whether a stock is overvalued, fairly valued, or undervalued using intrinsic value estimates. Topics include dividend payment types and chronology, dividend discount models (constant growth and multi-stage), free cash flow to equity models, valuation of preferred stock, price multiples, enterprise value multiples, and asset-based valuation models. The session also compares the advantages and limitations of each valuation approach, with a strong focus on exam application.\",\n  \"uploadDate\": \"2023-07-27\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/GWw4je023oo\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=GWw4je023oo\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/GWw4je023oo\",\n  \"duration\": \"PT53M43S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"What type of valuation model is primarily used when comparing a company\u2019s P\/E ratio to the industry average?\",\n    \"text\": \"At the beginning of 2016, stocks in the air transport industry had a trading price-to-earnings ratio of approximately 12. An analyst believes that Fly2U, a publicly traded air transport company, is undervalued primarily because its shares are trading at only 8 times trailing earnings. The analyst is primarily using what type of model to estimate Fly2U\u2019s share value?\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is a multiplier model. The analyst is using the price-to-earnings (P\/E) ratio, which is a valuation multiple, to compare Fly2U\u2019s valuation (8\u00d7 trailing earnings) with the industry average (12\u00d7 trailing earnings) in order to assess whether the stock is undervalued.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<p>\n  <iframe loading=\"lazy\"\n    src=\"\/\/www.youtube.com\/embed\/GWw4je023oo\"\n    width=\"611\"\n    height=\"343\"\n    allowfullscreen=\"allowfullscreen\">\n  <\/iframe>\n<\/p>\n\n\n\n<p>There are three major categories of equity valuation models: present value models, multiplier models, and asset-based valuation models.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Present Value Models\/Discounted Cash Flow Models<\/strong><\/h2>\n\n\n\n<p>These models estimate intrinsic value based on expected future benefits, usually based on expected dividends (dividend discount model) or expected free cash flows (free-cash-flow-to-equity models).<\/p>\n\n\n\n<a href=\"https:\/\/analystprep.com\/free-trial\/\"\n   target=\"_blank\"\n   rel=\"noopener noreferrer\"\n   style=\"\n     display:block;\n     margin:20px 0 28px;\n     padding:14px 18px;\n     border:2px solid #2563eb;\n     border-radius:12px;\n     text-align:center;\n     color:#2563eb;\n     text-decoration:none;\n     font-weight:500;\n     font-size:15px;\n     background-color:#ffffff;\n   \">\n   Review equity valuation models with a free trial.\n<\/a>\n\n\n<h2><strong>Multiplier Models\/Market Multiple Models<\/strong><\/h2>\n<p>These models are based on share price multiples or enterprise value multiples. Share price multiples usually calculate the intrinsic value based on the absolute or relative multiples of trailing or projected earnings or sales. Instead of using the share price in the numerator, enterprise value multiples use the company\u2019s enterprise value (<em>Market capitalization + Market value of debt and preferred shares &#8211; Cash equivalents<\/em>) and typically divide it by EBITDA (<em>EV\/EBITDA<\/em>) or total revenue (<em>EV\/Sales<\/em>).<\/p>\n<h2><strong>Asset-Based Valuation Models<\/strong><\/h2>\n<p>These models estimate intrinsic value based on the estimated value of a company\u2019s assets minus its liabilities, often through adjustments to its book value. In theory, the value of a business should be equal to the sum of the value of the business\u2019s assets.<\/p>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>At the beginning of 2016, stocks in the air transport industry had a trailing price-to-earnings ratio of approximately 12. An analyst believes that Fly2U, a publicly-traded air transport company, is undervalued primarily because its shares are trading at only 8 times trailing earnings.<\/p>\n<p>The analyst is primarily using what type of model to estimate Fly2U\u2019s share value?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Multiplier.<\/li>\n<li data-tadv-p=\"keep\">Asset-based.<\/li>\n<li data-tadv-p=\"keep\">Present value.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>The analyst in this scenario is primarily using a valuation model based on the price-to-earnings (P\/E) ratio. The P\/E ratio is a multiplier that relates a company&#8217;s stock price to its earnings per share. In this case, the analyst is comparing Fly2U&#8217;s P\/E ratio (8 times trailing earnings) to the industry average (12 times trailing earnings) to argue that Fly2U may be undervalued.<\/p>\n<\/blockquote>\n\n\n<div style=\"text-align:center;margin:50px 0 30px;\">\n\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n       display:inline-block;\n       padding:14px 34px;\n       background:linear-gradient(135deg,#4a74d1,#3b66c4);\n       color:#ffffff;\n       font-size:18px;\n       font-weight:600;\n       text-decoration:none;\n       border-radius:50px;\n       box-shadow:0 6px 18px rgba(59,102,196,0.25);\n     \">\n     Start Free Trial\n  <\/a>\n\n  <p style=\"\n       margin:18px auto 0;\n       max-width:620px;\n       font-size:16px;\n       line-height:1.6;\n       color:#333333;\n     \">\n     Strengthen your understanding of equity valuation approaches and model selection with CFA Level I exam-style practice questions.\n  <\/p>\n\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>There are three major categories of equity valuation models: present value models, multiplier models, and asset-based valuation models. Present Value Models\/Discounted Cash Flow Models These models estimate intrinsic value based on expected future benefits, usually based on expected dividends (dividend&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[8],"tags":[],"class_list":["post-1964","post","type-post","status-publish","format-standard","hentry","category-equity","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Categories of Equity Valuation Models | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn about the three main equity valuation models: present value, multiplier, and asset-based models, used for investment analysis.\" \/>\n<meta name=\"robots\" content=\"index, follow, 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