Equity Valuation: Concepts and Basic Tools

What the exam expects you to do

1. Evaluate whether a security, given its current market price and a.
2. Value estimate, is overvalued, fairly valued, or undervalued by the market.
3. Describe major categories of equity valuation models.
4. Describe regular cash dividends, extra dividends, stock dividends, stock splits, reverse stock splits, and share repurchases.
5. Describe dividend payment chronology.
6. Explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models.
7. Explain advantages and disadvantages of each category of valuation model.
8. Calculate the intrinsic value of a non-callable, non-convertible preferred stock.
9. Calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate.
10. Identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate.
11. Explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables.