Question

6. Explain why several valuation models are required to value a stock

7. Discuss why investors who identify positive-NPV trades should be skeptical about their findings unless they have inside information or a competitive advantage. As part of that, describe the return the average investor should expect to get.

8. What is the efficient market hypothesis? What are its implications for corporate managers?

Answer 1

7]

Stock valuation is a complex exercise involving several assumptions and judgements.

There exist several models to value stocks, each with different methodologies, inputs and assumptions.

Selecting any one valuation model assumes that the particular model is the best model to use, and this inherently subjects the valuation to the flaws of that particular model.

By using several valuation models to value a stock, a range of prices can be obtained. This is considered better than selecting any one valuation model and relying on that model's estimate of stock value. By using several valuation models instead of just one model, an average can be obtained which is considered a more accurate estimate of a stock's value.