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Chapter 10 Stock Valuation

How Much Is a Piece of a Company Worth?

PLEASE NOTE: This book is currently in draft form; material is not final.

It is truly amazing that almost anyone can, with minimal difficulty, become an owner of a multi-billion dollar corporation in just a few seconds by purchasing shares of stock using an internet broker. By the end of the day, that investment can change in market value, for better of for worse. But what is the “right” price for that piece of a company?

In this chapter we will compare various fundamental methods for valuing a share of stock. As a fair admission: if we could use these techniques to 100% accurately gauge the value of every stock (or even just a handful), we’d be living on a private island sailing a giant gold-plated yacht. Alas, not even Warren Buffett is right 100% of the time, though his investment strategy has been built from these fundamental principles we will discuss. Rather, the goal of this chapter is to provide a deeper understanding of what drives the value of a company’s equity, and to provide a foundation upon which accurate stock analysis techniques can be built. And, as future managers of corporations, if we understand what drives investors’ valuations, we can better understand how to increase our company’s share price.