BUSINESS ANALYSIS

A business can be valued by capitalizing its earnings stream (see example 6.19). How might you use the same idea to value securities, especially the stock of large publicly held companies? Is there a way to calculate a value that could be compared to the stocks market price that would tell an investor whether its a good buy? (If the market price is lower than the calculated value, the stock is a bargain.) What financial figures associated with shares of stock might be used in the calculation. Consider the per share figures and ratios discussed in chapter 3 including EPS, dividends, book value per share etc. Does one measure make more sense than the others? What factors would make a stock worth more or less than your calculated value.

Comment how a private company is valued by capitalizing a stream of earnings because all of a firms earnings are available to its owners.