4.S: Summary

Last updated
Save as PDF

Page ID: 83313

\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\)

Congratulations ‒ You Have Finished Chapter 4 ‒ Fundamental Analysis: Valuation Models

You have reached the end of chapter 4, Fundamental Analysis: Valuation Models. In this chapter, you have:

Been introduced to the definition and beginnings of stock valuation
Explored the various valuation models including the dividend discount models with an emphasis on the Gordon Growth Model and the Discounted Cash Flow modet
Examined the strengths and weaknesses of the various stock valuation techniques
Utilized an electronic spreadsheet to calculate the Internal Rate of Return from a series of cash outflows and inflows
Been introduced to The Value Line stock research resource and how to utilize key research information from their periodic stock reports

You should now be able to:

Describe the inherent difficulties of predicting stock valuations
Calculate the present value of the expected future stream of cash flow from various types of stocks using various valuation models
Discuss the benefits and major limitations of various valuation models
Given an electronic spreadsheet, calculate the Internal Rate of Return from given streams of cash outflows and inflows
Utilize key research data from The Value Line in our calculations of the various valuation models discussed

You Have Risen, Dear Student. You are now an official Investment Guru!

You have been initiated into the Sacred Temple of the Dividend Discount Models. It is a great privilege and honor, Dear Student, but it also carries tremendous responsibility. Never again can you look at a potential stock investment the same. You now will look at any potential stock investment through the eyes of one who understands how to value a future cash flow, whether it be from the dividends that the company pays or the expected future stock price or both. Congratulations! Go forth into the world, rejoicing in the power that you have been given. Help yourself and others! Identify and choose prudent, long-term stock investments that have done well in the past and should continue to do well into the future. Oh, and by the way, you are welcome.

Work through the examples and worksheets in this chapter over and over again until you can do them in your sleep. Then get out there and find companies that interest you and use these same models on them. What do the models say the companies’ stocks are worth? How is the market pricing their stocks? Finally, throw away all your calculations and ask yourself, “Do I want to be a partner in this company? Do I want to own a piece of this business?” We wish you the best of luck and success. It is our sincere desire that you become the best investors the world has ever seen!

There is a Future for You in the Investment Services Industry

Yeah, yeah, we know. You have heard it before. We want you to consider a career in the industry. Ah, we did mention that salaries in the financial and investment industries are well above the national norms, right? Okay, we just wanted to be sure.

Your Feedback Please

Yeah, yeah, we know. We’ve already asked you to give your feedback. So why do it again? Because we value your feedback greatly. Are you getting an education? Is the material too difficult? Too easy? What could we do better? What did we do well? For this to be the best class you have ever taken, we need your input!

Now that you have been introduced to a few valuation models, it is time to spend a bit of effort learning how to read financial statements. Relax, you Accounting students! We don’t do any journal entries or trial balances or any other accounting procedures. We just use the financial statements that the company’s accountants have created. See you in our next chapter, Chapter 5: Fundamental Analysis: Financial Statements and Ratio Analysis.