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The Streetsmart Guide To Valuing A Stock

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The Streetsmart Guide To Valuing A Stock

The Savvy Investor's Key To Beating The Market

McGraw-Hill,

15 min read
10 take-aways
Text available

What's inside?

Beat the darts with these time-tested investment tools.

Editorial Rating

7

Qualities

  • Applicable

Recommendation

Everything you need to know about how to value a stock is inside this book - somewhere. Finding it however, can be a problem, as it sometimes seems that the editors used the random dart theory of selection in putting together the chapters. For example, in order to understand the concepts presented in Chapter two, you need information that is contained in Chapters three and five. Once you figure out how to navigate it, though, this book is a valuable resource and a powerful educational tool for investors from neophyte to intermediate. It’s encyclopedic in its scope, and the pages in the included glossary are sure to become dog-eared from use. getAbstract.com recommends this book to investors of all levels. Beginners will learn critical concepts and terms, while more experienced investors will come to rely on this book as a trusted reference companion.

Summary

Valuation: A Four-Step Approach

Remember the idea that random dart throwing results in a better return than formal investment analysis? Well, the evidence is in - a methodical approach really does work better than "eenie, meanie, minee, moe." With stock prices on a bungee cord lately, you need to find an accurate valuation tool to help you distinguish undervalued stocks from their overvalued brethren. Enter the discounted cash flow (DCF) method. DCF works like this:

  1. Develop future free cash flow projections based on a company’s revenue growth, net operating profit margin, fixed and working capital requirements, and cash income tax rates.
  2. Estimate a discount rate for the cash flows, accounting for expected timing and potential risks to the cash flows.
  3. Discount the cash flow estimates, and add them together to calculate the value for the corporation as a whole.
  4. Reduce the corporate value by the amount of debt, preferred stock and other claims of the corporation. Divide the total by the number of shares outstanding to find the intrinsic value of the corporation’s common stock, on a per share basis.

About the Authors

Gary Gray, Ph.D is a visiting professor of finance at Pennsylvania State University. He consults regularly with investment and commercial banks, and was managing director of a major Wall Street investment bank. Patrick J. Cusatis, Ph.D teaches finance at Pennsylvania State and is a director at First Union National Bank. He has also written articles and a previous book. J. Randall Woolridge, Ph.D. CNN’s Money Line and CNBC’s Business Today and has written several journal articles

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