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Fundamental Analysis

A Fundamental Approach to Stock Valuation

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Finance majors contributing to the SMIF in Finance 410 learn fundamental security analysis including research at the economic, industry, and company level. In addition, students are exposed to principles of portfolio management including advanced quantitative risk management, portfolio theory and the capital asset pricing model. Students are then expected to build six fundamental valuation models in Microsoft Excel using Bloomberg’s API software.

Students master the six pricing models, becoming familiar with their strengths and shortcomings, and draw on them to make BUY/HOLD/SELL decisions.

Pricing Models

    Div GrowthDividend Growth
    the classic “intrinsic value” metric rests on a number of assumptions, including dividend growth rates.

    Market MultiplesMarket Multiples

    after identifying a strong peer group, using ratios like market/book and price/earnings helps to establish a competitor-based valuation.

    Hold Per ReturnHolding Period Return

    a variation of the dividend discount model, HPR allows students to calculate the sum of the present value of the dividend cash flows as well as its theoretical intrinsic price

    Enterprise ValueEnterprise Value

    one of the most widely used valuation methods, EV is the theoretical takeover price for an acquirer. Analysts prefer it because it includes the firm’s debt as an incurred cost

    Residual IncomeResidual Income

    this approach gives users an idea of the cash that a company generates in excess of its cost of capital. This method accounts for equity capital as well as debt.

    FCFFree Cash Flow

    perhaps the most popular valuation employed by Wall Street analysts, this method involves projecting future cash flows and discounting them at the WACC to find the firm’s present value.