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Appraisal Rights


Intrinsic Value Realization




The Delaware Supreme Court issued a ruling on December 14, 2017 that endorsed its interpretation of the "Efficient Market Hypothesis" as a foundation for relying upon market pricing to define a company’s “fair value” in appraisal proceedings. The Forum accordingly reported that it would resume support of marketplace processes instead of judicial appraisal for its participants' realization of intrinsic value in opportunistically priced but carefully negotiated buyouts. See:

December 21, 2017 Forum Report

 Reconsidering Appraisal Rights for Long Term Value Realization



Forum reference:

Summary of how professional investors analyze a company's intrinsic value


The CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials, with more than 132,000 individual members and 145 member societies. Its Claritas Program, for which the article below was published, was developed to provide an understanding of professional investment for employees who work with or for financial services organizations.


Source: CFA Institute, July 9, 2015 article

In the News: Stock Valuation

In February 2015, Bloomberg reported that Tesla chairman and CEO Elon Musk had indicated that Tesla’s market valuation would approach $700 billion in a decade, up from approximately $27 billion at the time. Musk said, “Our market cap would be basically the same as Apple’s is today.”

It's not unusual for managers of publicly held firms to suggest that their companies’ stocks are undervalued, but it is rare for them to make precise projections about the future valuation of their firms’ equity. After all, a firm’s stock price is not entirely within a company’s control. Investor sentiment, competition, and the regulatory environment are just some of the factors affecting a stock’s valuation.

In this article, we take a closer look at a key topic in the Claritas course of study—stock valuation (Module 4, Investment Instruments)—to understand how investors can evaluate investment opportunities. For example, valuation helps investors uncover underpriced or overpriced securities, and an enterprising investor will take advantage of these mispricings.

Approaches to Stock Valuation

There are three basic approaches to the valuation of common stock: discounted cash flow valuation, relative valuation, and asset-based valuation.

Discounted Cash Flow Valuation

The discounted cash flow (DCF) approach takes into account the time value of money. It estimates the value of a security as the present value of all future cash flows—that is, dividends and the proceeds from selling—that the investor expects to receive from the security.

The DCF valuation approach relies on an analysis of the unique characteristics of the company issuing the shares, such as the company’s ability to generate earnings, the expected growth rate of earnings, and the level of risk associated with the company’s business.

An Example of Discounted Cash Flow Valuation

On 1 January 2015, an investor expects Volkswagen to generate dividends of €4.00 per share at the end of 2015, €4.20 per share at the end of 2016, and €4.50 per share at the end of 2017. The investor also estimates that the stock price of Volkswagen will trade at €150.00 per share at the end of 2017. The investor considers the risks associated with the investment and concludes that a discount rate (the rate used to calculate the present value of some future amount) of 14% is appropriate.

The investor computes the present value of the expected cash flows as follows:

The investor’s estimated value of Volkswagen on a per share basis is €111.02. If the shares of Volkswagen are priced at less than €111.02 on 1 January 2015, the investor may conclude that the stock is undervalued and decide to buy it. Alternatively, if the stock trades at more than €111.02, the investor may conclude that the stock is overvalued.

Relative Valuation

The relative valuation approach estimates the value of a common share as the multiple of some measure, such as earnings per share (EPS) or revenue per share. The multiple is determined based on price and the relevant measure for publicly traded, comparable equity securities.

The key assumption of the relative valuation approach is that common shares of companies with similar risk and return characteristics should have similar values.

An Example of Relative Valuation

An investor is estimating the value of an airline’s common stock on a per share basis. The airline in question generates annual EPS of €2.00 and exhibits risk and return characteristics that are in line with the industry average. The investor finds that the average price-to-earnings multiple, or P/E, for the industry is 9. Using relative valuation, the investor estimates that the value of the airline’s stock, on a per share basis, is €18.00 (= €2.00 x 9).

Asset-Based Valuation

The asset-based valuation approach estimates the value of common stock by calculating a company’s net asset value, which is the difference between the value of a company’s total assets and its outstanding liabilities. The asset-based valuation approach implicitly assumes that the company is liquidated, sells all its assets, and then pays off all its liabilities. The residual value after paying off all liabilities is the value to shareholders.

It is important to note that some asset values on the balance sheet are based on historical cost (the cost when they were purchased), and the actual market value of these assets may be very different. For instance, the value of land on a company’s balance sheet, typically carried at historical cost, may be quite different from its current market value. As a result, using asset values taken directly from the balance sheet may provide a misleading estimate. To improve the accuracy of the value estimate, current market values should be estimated instead.

Also, some assets, including some internally developed intangible assets, such as a brand or reputation, may not be included on the balance sheet because of financial reporting rules. Thus, it is important when using asset-based valuation to estimate reasonable values for all of a company’s assets, which can be very challenging to do.

Bottom Line: Stock Valuation

Valuing common shares is an imprecise science and different valuation methodologies can yield different results. Nevertheless, valuation should be considered a foundational component of the investment decision-making process. It is the process by which investors can make a reasoned determination about whether Tesla will be able to duplicate Apple’s success and warrant a market capitalization of $700 billion.

© 2015 CFA Institute. All Rights Reserved.


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