FIN4426_Chap_11

FIN4426_Chap_11 - C h a p t e r 1 1 C h a p t e r 1 1 An...

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Unformatted text preview: C h a p t e r 1 1 C h a p t e r 1 1 An Introduction to Security Valuation An Overview of the Valuation Process Three-Step Valuation Process Theory of Valuation Valuation of Alternative Investments Relative Valuation Techniques Estimating the Inputs: k and g 11-2 Two General Approaches Top-down, three-step approach Bottom-up, stock valuation, stock picking approach The difference between the two approaches is the perceived importance of economic and industry influence on individual firms and stocks Both of these approaches can be implemented by either fundamentalists or technicians Overview of the valuation process 11-3 Overview of the valuation process The Three-Step Top-Down Process First examine the influence of the general economy on all firms and the security markets Then analyze the prospects for various global industries with the best outlooks in this economic environment Finally turn to the analysis of individual firms in the preferred industries and to the common stock of these firms. See Exhibit 11.1 11-4 Exhibit 11.1 11-5 Three-Step Valuation Approach General Economic Influences Fiscal policy initiatives, such as tax credits or tax cuts, can encourage spending Monetary policy though controlling money supply growth or interest rate therefore affects all segments of an economy and that economys relationship with other economies Inflation causes changes the spending and savings behavior of consumers and corporations Other events such as war, political upheavals in foreign countries, or international monetary devaluations exert strong effects on the economies 11-6 Three-Step Valuation Approach Industry Influences Identify global industries that will prosper or suffer in the long run or during the expected near-term economic environment Different industries react to economic changes at different points in the business cycle Alternative industries have different responses to the business cycle Demographic factor and international exposure will also have different impacts on different types of industries 11-7 Three-Step Valuation Approach Company Analysis The purpose of company analysis to identify the best companies in a promising industry This involves examining a firms past performance, but more important, its future prospects It needs to compare the estimated intrinsic value to the prevailing market price of the firms stock and decide whether its stock is a good investment The final goal is to select the best stock within a desirable industry and include it in your portfolio based on its relationship (correlation) with all other assets in your portfolio 11-8 Does the Three-Step Process Work?...
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FIN4426_Chap_11 - C h a p t e r 1 1 C h a p t e r 1 1 An...

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