Question

How do you value a stock? Is subtracting liabilities from assets a good way to find value of stock of a company?

Answer 1

Assets - Liabilities is the current book value of the stock and is not the actual value that can be generated through the business. To value a stock one can follow the two approaches:

a) Dividend discount model: In this case the dividends are expected to be paid over perpetuity and the value of the stock is measured by discounting the present value of the dividends

b) Free cash flow method: In this method the free cash flow available to investors is determined over the a period and a terminal value is arrived at after a certain number of years. The total value is determined by discounting with WACC. Debt and preferred shares are deducted to arrive at the equity value.