The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

CHAPTER 10

Approaches to Common Stock Valuation

Pamela P. Drake, Ph.D., CFA J. Gray Ferguson Professor Finance College of Business James Madison University

 

Frank J. Fabozzi, Ph.D., CFA, CPA Professor in the Practice of Finance Yale School of Management

 

Glen A. Larsen Jr., Ph.D., CFA Professor of Finance Indiana University Kelley School of Business–Indianapolis

 

 

 

 

 

In this chapter, we discuss practical methods of valuing common stock using two methods: discounted cash flow models and relative valuation models. Both methods require strong assumptions and expectations about the future. No one single valuation model or method is perfect. All valuation estimates are subject to model error and estimation error. Nevertheless, common stock analysts use these models to help form their expectations about a fair market price. In later chapters, other valuation models and approaches are discussed.