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Several factors, both internal and external, impact a company’s stock price, and the
subsequent perceived valuation of a company. Sometimes that perceived value matches that of
the financial statements, and other times it is vastly different. Therefore, discuss the factors that
lead to a valuation of a company’s worth compared to that of the financial statements, and how
company executives create the most value for all stakeholders.
When financial analysts need to value a business, they often start by identifying a sample
of similar firms. They then examine how much investors in these companies are prepared to pay
for each dollar of assets or earnings. This is often called valuation by comparable (Brealey,
Meyers, & Marcus, 2013, pg. 191). A valuation model is a mechanism that converts a set of
forecasts or observations of a series of firm, industry and economic variables into a forecast of
market value for the firms stock (Kakati, 2005, p, 513). There are many models that exist, but
they all have the same goal of identifying the major determinant of common stock prices and the
weight the market place on these determinant. It is also important to note that all of the modes
are highly successful in explaining the stock prices at a point in time, but they are much less
successful in selecting the appropriate stocks to buy or sell short (Kakati, 2005, p. 513).
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References
Brealey, Meyers & Marcus (2012). Fundamentals of Corporate Finance. McGraw-Hill
Companies, New Your, NY.
Kakati, M. (2005). Stock valuation process - the practitioners' view. Finance India, 19(2), 513-
523. Retrieved from http://search.proquest.com/docview/224364622?accountid=12085.
