UNIVERSITY OF KOTLI

Presentation: 01

 Name Faizan Nisar

Roll no. 20
M.com 4th semester
Subject : Investment Analysis and Portfolio
management
TOPiCS NAME:

 AN OVERVIEW OF THE VALUATION PROCESS

 THREE-STEP VALUATION PROCESS
 THEORY OF VALUATION
OVERVIEW OF THE VALUATION
PROCESS

 Psychologists suggest that the success or failure of an

individual can be caused as much by his or her social,
economic, and family environment as by genetic gifts.
Extending this idea to thevaluation of securities means we
should consider a firm’s economic and industry environment
during the valuation process.
 Regardless of the qualities or capabilities of a firm and its
management, the economic and industry environment will
have a major influence on the success of a firm and the
realized rate of return on its stock.
THREE-STEP VALUATION
PROCESS

 General Economic Influences

 Industry Influences
 Company Analysis
General Economic Influences

 Monetary and fiscal policy measures enacted by various

agencies of national governments influence the aggregate
economies of those countries. The resulting economic
conditions influence all industries and companies within the
economies.
General Economic Influences

 Fiscal policy initiatives, such as tax credits or tax cuts, can

encourage spending, whereas additional taxes on income,
gasoline, cigarettes, and liquor can discourage spending.
 Increases or decreases in government spending on defense, on
unemployment insurance, retraining programs, or on highways
also influence the general economy•
Industry Influences

 The second step in the valuation process is to identify global

industries that will prosper or suffer in the long run or during
the expected near-term economic environment.
 Examples of conditions that affect specific industries are
strikes within a major producing country, import or export
quotas or taxes, a worldwide shortage or an excess supply of a
resource or product, or government-imposed regulations on an
industry.
Company Analysis

 After determining an industry’s outlook, an investor can

analyze and compare an individual firm’s performance relative
to the entire industry using financial ratios and cash flow
values.
 As we discussed in Chapter 10, many financial ratios for firms
are valid only when they are compared to the performance of
their industries.
THEORY OF VALUATION

 You may recall from your studies in accounting, economics, or

corporate finance that the value of an asset is the present value
of its expected returns. Specifically, you expect an asset to
provide a stream of returns during the period of time you own
it. To convert this estimated stream of returns to a value for the
security, you must discount this stream at your required rate of
return.
 This process of valuation requires estimates of: (1) the stream
of expected returns and (2) the required rate of return on the
investment (its discount rate).
Stream of Expected Returns (Cash
Flows)

 An estimate of the expected returns from an investment

encompasses not only the size but also the form, time pattern,
and uncertainty of returns, which affect the required rate of
return
Required Rate of Return

 Uncertainty of Returns (Cash Flows) You will recall from

Chapter 1 that the required rate of return on an investment is
determined by: (1) the economy’s real risk-free rate of return,
plus (2) the expected rate of inflation during the holding
period, plus (3) a risk premium that is determined by the
uncertainty of returns.
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THANK YOU….
”