Equity valuation& analysis Essay Example | Topics and Well Written Essays - 500 words

Equity valuation& analysis - Essay ExampleThe given quotes indicate that the general principles vary by the market participants do not include the use of price reductioned cash flow method. Most of the market participants use their professional judgment in valuing the securities and their try come to the fore their returns rather than using more sophisticated methods to nurse securities.Literature on coronation and corporate finance indicates that the best method to find out the shelter of any investment is to discount the future stream of cash flows that an investor expects to receive with an appropriate discount rate. This discounting of future cash flows i.e. dividends, therefore lead to finding out the intrinsic value of an investment. The critical difference between intrinsic value of any investment and its market price lies in the fact that intrinsic value is what the value of security should have been and market price is the actual money placed by the market on that sec urity. The difference between the two set therefore indicates whether a security is under-valued or over-valued. Value investors therefore often tend to find out this difference in order to make their investment decisions.It is also important to note that the discounted cash flow method takes into account the element of risk which other methods fail to integrate. The discount rate which is used to discount the future streams of cash flows takes into account the risk premium which compensates an investor for taking risk by buying a particular security. Discount rate is often mensurable with the help of Capital Asset Pricing model which is based upon the risk free rate, the correlation of individual security returns with that of the market returns and the market risk premium. so if an investor uses discounted cash flow method to find the true value of an investment, the element of risk is already