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New Dimension in Equity Valuation

Author Affiliations

  • 1Department of Management Studies, Government Engineering College Ajmer, INDIA

Res. J. Management Sci., Volume 2, Issue (11), Pages 39-42, November,6 (2013)


The studies on market efficiency clearly depict that it is very difficult to find out the undervalued securities. On the other hand, such undervalued securities cannot be left due to practical difficulties in their identification. There are many models available used to identify the mispriced securities. One of the methods prominently used for the valuation of securities is price-earnings ratio. Investors have been dependent on the price-to-earnings (P/E) ratio as a tool to decide investment in a particular stock for several years. It has emerged as a simple way to get a sense of how market value of a company’s stock compares to its earnings. However, there is a considerably significant problem with this ratio as neither the company's stock price is the true representative of a company's value in the real world nor the earnings of a company are reliable as the same can be easily manipulated. Thus, if an investor wants to really get a glimpse of a company’s value as compared to others, he needs new dimension in value philosophy. The present paper describes the very less talked dimension in equity valuation i.e., Enterprise Value. Enterprise value is described as a value that, in theory, represents the entire cost of a company, if someone acquires it. It offers more accurate estimate of takeover cost than market capitalization because it includes a number of important factors such as preferred stock, debt, and cash reserves that are ignored otherwise. The paper also highlights how application of this new dimension in equity valuation helps tremendously in investment decisions, particularly during different phases of market, by taking up a case study of equities from a common industry.


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