There are 2 valuation approaches. The difference between these 2 approaches is the perceived importance of the economy and a firm's industry on the valuation:
1. The top-down, three-step approach. The advocates of this approach believe that both the economy/market and the industry effect have a significant impact on the total returns for individual stocks.
1) Analysis of alternative economies and security markets.
2) Analysis of alternative industries.
3) Analysis of individual companies and stocks.
2. The bottom-up, stock valuation, stockpicking approach. Those who employ this approach contend that it is possible to find stock that are undervalued relative to their market price, and these stocks will provide superior returns regardless of the market and industry outlook.
Discount Dividend Model
Present Value of Operating Free Cash Flow
Present Value of Free Cash Flow to Equty
Relative Valuation Techniques:
Earning Multiplier Model (P/E ratio): Current Market Price / Expected Earnings
P=D1/(k-g) => P/E1 = (D1/E1) / (k-g)
The spread of k and g is the main determinant of the size of the P/E
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