Equity Valuation: Concepts and Basic Tools

How analysts estimate what a share is really worth and compare it with the market price: present value models (dividend discount, two-stage and free cash flow to equity), preferred stock, price and enterprise value multiples, and asset-based valuation, with the strengths and limits of each.

1. 1. Intrinsic value, mispricing and the three model familiesValuation means estimating what a share is worth from its fundamentals and comparing that estimate with the market price, using one or more of three model families.Video · 6 minFree11 min
2. 2. Dividends, splits, buybacks and the payment timelineOnly cash distributions change what shareholders receive: stock dividends and splits just cut the same pie into more slices, a buyback is equivalent to a cash dividend, and a share stops carrying the dividend on its ex-date.Video · 6 minFree12 min
3. 3. Present value models: DDM and FCFEA share is worth the present value of the cash it will deliver: either the dividends expected (DDM) or the cash the company could pay out (FCFE), discounted at the required return on equity.Video · 5 minFree13 min
4. 4. Preferred stock and the Gordon growth modelA perpetual preferred share is a perpetuity worth D/r, and a common share with dividends growing at a constant rate forever is a growing perpetuity worth $D_1/(r-g)$.Video · 6 min15 min
5. 5. Multistage dividend discount modelsWhen growth will change, forecast the dividends of the unusual period one by one, value everything after it with the Gordon model as a terminal value at time n, and discount both back to today.Video · 5 min14 min
6. 6. Price multiples and the method of comparablesA price multiple compares a share's price with a per-share fundamental; you can judge it against fundamentals (the justified P/E from the Gordon model) or against similar companies (the method of comparables).Video · 6 minFree14 min
7. 7. Integrated cases: why multiples differ, the justified P/E and comparablesA P/E gap is explained by growth, payout and risk together; the justified P/E needs normalised inputs and a sensitivity check; and a multiple judged against history and peers can give conflicting signals that call for more information.18 min
8. 8. Enterprise value multiples, asset-based valuation and choosing a modelEnterprise value prices the whole business net of its cash, so EV multiples compare companies with different capital structures; asset-based models value a company as what it owns minus what it owes; and combining models guards against the weaknesses of each.Video · 5 min15 min
9. 9. Integrated cases: growth from dividend history, enterprise value and reconciling modelsEstimate g from the dividend history (five observations make four growth periods), stress the Gordon value, build enterprise value with debt at market value, and reconcile several models by examining the assumptions behind their differences.18 min