Discuss the following topics related to the valuation of securities and conduct

Question

Discuss the following topics related to the valuation of securities and conduct the prescribed analysis:
(a) Relative Valuation is also often called Valuation by Comparables. Which indicators do you believe provide the best assessment of relative value and explain why? Use the available relative valuation models to conduct a valuation of a common stock of your choice?
(b) Using the facilities of Value Pro (http://www.valuepro.net) select a common stock of your choice and conduct a discounted cash flow valuation. The analysis should explain each variable used in the analysis, why you accepted the given input, or how and why you changed a variable. The analysis should also examine the relevant cash flows, compare the final valuation to the stock

Explanation / Answer

Part (a) Relative valuation, estimates the value of an asset by looking at the pricing of 'comparable' assets relative to a common variable like earnings, cashflows, book value or sales. The value of any asset can be estimated by looking at how the market prices “similar” or ‘comparable” assets. Philosophical Basis: The intrinsic value of an asset is impossible (or close to impossible) to estimate. The value of an asset is whatever the market is willing to pay for it (based upon its characteristics) Information Needed: To do a relative valuation, you need an identical asset, or a group of comparable or similar assets a standardized measure of value (in equity, this is obtained by dividing the price by a common variable, such as earnings or book value) and if the assets are not perfectly comparable, variables to control for the differences Relative valuation is much more likely to reflect market perceptions and moods than discounted cash flow valuation. This can be an advantage when it is important that the price reflect these perceptions as is the case when the objective is to sell a security at that price today (as in the case of an IPO) investing on “momentum” based strategies With relative valuation, there will always be a significant proportion of securities that are under valued and over valued. Since portfolio managers are judged based upon how they perform on a relative basis (to the market and other money managers), relative valuation is more tailored to their needs.

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