What is the Diluted EPS Formula? The Diluted EPS formula is equal to net income less preferred dividends, divided by the total number of diluted shares outstanding (basic shares outstanding plus the exercise of in-the-money options, warrants, and other dilutive securities). Diluted EPS Formula: Diluted EPS = (net income – preferred dividends) / (weighted average…
What is Equity Value? Equity value, commonly referred to as the market value of equity or market capitalization, can be defined as the total value of the company that is attributable to equity investors. It is calculated by multiplying a company’s share price by its number of shares outstanding. Alternatively, it can be derived by…
What is the Gordon Growth Model? The Gordon Growth Model – otherwise described as the dividend discount model – is a stock valuation method that calculates a stock’s intrinsic value. Therefore, this method disregards current market conditions. Investors can then compare companies against other industries using this simplified model. Myron J. Gordon (Source: Globe and…
What is the Terminal Growth Rate? The terminal growth rate is the constant rate at which a firm’s expected free cash flows are assumed to grow indefinitely. This growth rate is used beyond the forecast period in a discounted cash flow model, from the end of the forecasting period in perpetuity, we will assume that…
What is Economic Value Added (EVA)? Economic Value Added (EVA), sometimes known as Economic Profit, is a measure based on the Residual Income technique, which measures the return generated over and above investors’ required rate of return (hurdle rate). EVA serves as an indicator of the profitability of projects in which a company invests. Its…
What is the Arbitrage Pricing Theory? The Arbitrage Pricing Theory (APT) is a theory of asset pricing that holds that an asset’s returns can be forecasted with the linear relationship of an asset’s expected returns and the macroeconomic factors that affect the asset’s risk. The theory was created in 1976 by American economist, Stephen Ross….
What is EV/EBITDA? EV/EBITDA is a ratio that compares a company’s Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA). The EV/EBITDA ratio is commonly used as a valuation metric to compare the relative value of different businesses. In this guide, we will break down the EV/EBTIDA multiple into its various…
Stable Growth vs. 2-Stage Valuation Model In valuation, we can find useful insights by comparing theories embedded in different valuation models at our disposal. In preparing a valuation model, however, an important insight becomes apparent. When we are attempting to forecast the future cash flows of a company, a trade-off exists between the complexity of…
What is Synergy Valuation? When a company acquires another business, it is often justified by the argument that the investment will create synergies. The primary source of synergy in an acquisition is in the presumption that the target firm controls a specialized resource that becomes more valuable if combined with the acquiring firm’s resources. There…
