Company Valuation Methods

Question 1

Earnings per Share (EPS)

Answer 1

Measures profit attributable to each equity share.

Formula:
EPS = Profit attributable to equity shareholders ÷ Weighted average number of shares

Basic indicator of company performance from a shareholder’s perspective.

Question 2

Price to Earnings Ratio

Answer 2

Shows the market price of a share relative to its EPS.

Formula:
P/E = Market price per share ÷ EPS

Higher P/E may indicate growth expectations, but also higher risk.

Question 3

Relative Valuation

Answer 3

Compares the company’s metrics with similar firms in the industry.

Uses ratios like P/E, EV/EBITDA, etc.

Measures value based on risk, return, and liquidity relative to peers.

Question 4

Dividend Valuation Models

Answer 4

Based on present value of expected future dividends:

1) Zero Growth: Assumes dividends remain constant.

2) Variable Growth: Forecast different dividend growth rates for different periods.

3) The Gordon growth model (GGM) is a formula used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate.

Question 5

Discounted Cash Flow

Answer 5

Calculates the present value of future free cash flows.

Values a company based on cash generation potential.

Uses net present value (NPV) and an appropriate discount rate.

Question 6

CAPM

Answer 6

Helps determine the expected return on an investment based on its risk. It establishes a relationship between risk and expected return, assuming a linear connection where taking on more risk, on average, leads to higher returns.

Helps estimate a discount rate for valuing future cash flows.

Compares the calculated fair value of an asset to its market price.

Question 7

Efficient Market Hypothesis (EMH)

Answer 7

Asserts that share prices reflect all available information.

Markets can be weak, strong, or semi-strong.

Implication: It’s difficult to consistently outperform the market.

Affects how valuation methods (e.g., P/E or DDM) are interpreted.

Question 8

Shareholder Value Analysis

Answer 8

Focuses on maximizing shareholder wealth.

Values a company based on NPV of future free cash flows.

Value drivers include revenue growth, margins, capital efficiency, etc.

Question 9

Economic Value Added

Answer 9

Measures value created beyond the cost of capital.

EVA = NOPAT – (Capital × WACC)
(NOPAT = Net Operating Profit After Tax)

Question 10

Market Value Added

Answer 10

Measures market’s perception of value added over invested capital.

MVA = Market value of firm – (Equity + Long-term debt)