Stock valuation concepts and applications

Abstract

The purpose of this thesis is to highlight and increase the importance of using a new model known as "the intrinsic value" model in the valuation of stocks; while decreasing the dependence of the price earning ratio concept in determining the true worth of the stock. A concise summary is first given about the US stock market, how it functions, the types of stocks offered, its exchanges, and its players. The price earnings ratio concept with its pros and cons will be presented in "Chapter Three". Moreover, the macroeconomic and microeconomic factors affecting the price and earnings (two essential components of price earnings ratio) of the stock will be shown in this chapter. "Chapter Four" will discuss the value investing concept and its techniques namely; the discounted Cash Flow Technique and the Relative Valuation Technique. "Chapter Five" considers the calculation of the intrinsic value in two different methods: the balance sheet approach and the income statement approach where the emphasis is on the latter approach. the intrinsic value obtained from the income statement approach is then used to compare it with the market value estimate to determine whether the stock is undervalued, fair or overvalued. The last chapter, "Chapter Six", concludes the thesis with its findings and recommendations.