Abstract
This chapter explores the various valuation methodologies associated with the management of shares. Many investors rely on values obtained from various valuation techniques to make investment decisions and to interpret financial information. Some theorists claim that stock prices cannot be predicted, particularly in the short term, and that no stock valuation model can accurately uncover under- or overpriced stocks. Nonetheless, it is important for fund managers and analysts to have some sort of consistent methodology with which to rank a universe of shares. Also, if the market is using a particular valuation technique, the ‘herd mentality’ could affect the prices of the underlying shares. Thus, it is useful to be aware of some of the most popular valuation methods currently utilized. Stock valuation methodologies can either be based on the discounted cash flow (DCF) principle, which states that the current value of an asset is the present value of all its future cash flows, or on financial ratio analysis. Using discounted cash flows involves forecasting future cash flows and estimating the appropriate discount rate to use for the calculation.
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