Stock Advisor Stock Valuation Techniques

Question 1

What is 'intrinsic value' in stock valuation?

Accepted Answer

The estimated true worth of a stock based on fundamental analysis, independent of its market price

Answer

Intrinsic value is the calculated or estimated true worth of a stock based on fundamentals like earnings, cash flows, and assets, which may differ from its current market price.

Question 2

What does 'EV/EBITDA' measure and why is it used?

Accepted Answer

Enterprise value relative to earnings before interest, taxes, depreciation, and amortization — useful for comparing companies regardless of capital structure

Answer

EV/EBITDA compares enterprise value to EBITDA, making it useful for comparing companies with different debt levels and tax situations across industries.

Question 3

What is 'dividend discount model' (DDM) used for?

Accepted Answer

Valuing a stock based on the present value of expected future dividends

Answer

The DDM values a stock by discounting its expected future dividends back to the present, making it most applicable to companies with stable, predictable dividend streams.

Question 4

What is 'precedent transaction analysis' in stock valuation?

Accepted Answer

Valuing a company by looking at prices paid in similar M&A deals

Answer

Precedent transaction analysis values a company by examining the multiples paid in similar past M&A transactions, often incorporating a control premium.

Question 5

What is the 'PEG ratio' and what does it add over the standard P/E?

Accepted Answer

Price-to-Earnings-Growth ratio — adjusts the P/E for the company's earnings growth rate to better assess valuation

Answer

The PEG ratio divides the P/E by the earnings growth rate, helping investors determine whether a high P/E is justified by strong growth — a PEG below 1 is often considered attractive.

Stock Advisor Practice Test

Stock Advisor Practice Test

Stock Advisor Stock Valuation Techniques