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EQUITY VALUATION: CONCEPTS AND BASIC TOOLS

Q: When is an asset fairly valued, undervalued, or overvalued?

Fairly valued → market price = estimated intrinsic value Undervalued → market price < estimated intrinsic value Overvalued → market price > estimated intrinsic value Feynman method: Think of intrinsic value as what the asset is really worth if you had perfect information. You simply compare your estimate to what the market is currently charging .

Q: What must happen for security valuation to generate profit, whenever it is underpriced?

For valuation to be profitable: The security must be mispriced now , and The market price must move toward intrinsic value within your investment horizon. Feynman: Spotting a cheap stock is not enough—you only earn money if the market eventually agrees with you. If the price never corrects, no profit.

Q: What is the relationship between analyst coverage and the likelihood that a security is fairly valued versus mispriced?

High analyst coverage → fairly valued . Low or no analyst coverage → more likely mispriced .

Q: In the enterprise value (EV) formula, what does “equity” mean? Is it accounting equity or something else?

In the EV formula, “equity” means market equity value , not accounting equity. Equity Value = Market Cap = Share Price × Shares Outstanding It does not include retained earnings, APIC, or treasury stock (those are book equity ). EV represents the total cost to buy the entire company , so it uses the market price of equity , not accounting numbers. EV=Market Equity+Debt−Cash EV = Market Equity + Debt − Cash Feynman summary: Equity in EV is what it costs to buy all the shares today. EV = buy all shares + take over debt – get the cash inside.

4 important questions on EQUITY VALUATION: CONCEPTS AND BASIC TOOLS

When is an asset fairly valued, undervalued, or overvalued?

Fairly valued → market price = estimated intrinsic value
Undervalued → market price < estimated intrinsic value
Overvalued → market price > estimated intrinsic value

Feynman method:
Think of intrinsic value as what the asset is really worth if you had perfect information.
You simply compare your estimate to what the market is currently charging.

What must happen for security valuation to generate profit, whenever it is underpriced?

For valuation to be profitable:

The security must be mispriced now, and
The market price must move toward intrinsic value within your investment horizon.

Feynman:
Spotting a cheap stock is not enough—you only earn money if the market eventually agrees with you. If the price never corrects, no profit.

What is the relationship between analyst coverage and the likelihood that a security is fairly valued versus mispriced?

High analyst coverage → fairly valued.
Low or no analyst coverage → more likely mispriced.

In the enterprise value (EV) formula, what does “equity” mean?
Is it accounting equity or something else?

In the EV formula, “equity” means market equity value, not accounting equity.

Equity Value = Market Cap = Share Price × Shares Outstanding
It does not include retained earnings, APIC, or treasury stock (those are book equity).
EV represents the total cost to buy the entire company, so it uses the market price of equity, not accounting numbers.

EV=Market Equity+Debt−Cash EV = Market Equity + Debt − CashFeynman summary:
Equity in EV is what it costs to buy all the shares today.
EV = buy all shares + take over debt – get the cash inside.

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