Unit-4 Stock Valuation- Business Accounting| BBA First Year
Unit-4 Stock Valuation- Business Accounting| BBA First Year

Unit-4 Stock Valuation- Business Accounting| BBA First Year

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Unit-4 Stock Valuation- Business Accounting| BBA First Year
Business Accounting

Stock Valuation

  • Every investor who wants to beat the market must master the skill of stock valuation. Essentially, stock valuation is a method of determining the intrinsic value (or theoretical value) of a stock. The importance of stock valuation arises from the fact that the intrinsic value of a stock is not tied to its current price. By knowing a stock’s intrinsic value, an investor can determine whether the stock is over- or undervalued at its current market price.
  • Valuing stocks is an extremely complex process that can generally be viewed as a combination of both art and science. Investors can become overwhelmed by the amount of information available that can potentially be used in evaluating a stock (company financials, newspapers, economic reports, stock reports, etc.).
  • Therefore, an investor needs to be able to filter relevant information from unnecessary noise. Additionally, an investor should know about the major stock valuation methods and the scenarios in which such methods are applicable.

Types of Stock Valuation

  • Stock valuation methods can be broadly classified into two main types: absolute and relative.
  1. Absolute

  • The entire stock valuation depends on the fundamental information of the company. This method generally involves the analysis of various financial information that can be found in or obtained from a company’s financial statements. Several techniques of complete stock valuation primarily examine the company’s cash flows, dividends, and growth rates. Notable absolute stock valuation methods include the dividend discount model (DDM) and the discounted cash flow model (DCF).
  1. Relatives

  • Relative stock valuation deals with comparing investments with similar companies. The relative stock valuation method deals with the calculation of key financial ratios of similar companies and the derivation of similar ratios for the target company. The best example of relative stock valuation is the analysis of comparable companies.

Popular Stock Valuation Methods

  • Below, we will briefly discuss the most popular methods of stock valuation.
  • Dividend Discount Model (DDM)
  • The dividend discount model is one of the basic techniques of absolute stock valuation. DDM is based on the assumption that a company’s dividends represent cash flows to the company’s shareholders.
  • Essentially, the model states that the intrinsic value of a company’s share price is equal to the present value of the company’s future dividends. Note that the dividend discount model is only applicable if a company regularly distributes dividends and the distribution is stable.
  • Discounted Cash Flow Model (DCF)

    Read morehttps://pencilchampions.com/relevance-of-economics-in-business-managementunit-1-poe-bba-1st-semester/


  • The discounted cash flow model is another popular method of absolute stock valuation. Under the DCF approach, the intrinsic value of a stock is calculated by subtracting the company’s free cash flow from its current value.
  • The main advantage of the DCF model is that it does not require any assumptions regarding the distribution of dividends. Thus, it is suitable for companies with unknown or unpredictable dividend distributions. However, the DCF model is sophisticated from a technical perspective.
  • Analysis of comparable companies
  • Comparable analysis is an example of relative stock valuation. Rather than determining a stock’s intrinsic value using company fundamentals, the comparable approach aims to derive a theoretical price of the stock using price multiples of similar companies.
  • The most commonly used multiples include price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA). The comparable companies analysis method is one of the simplest from a technical perspective. However, the most challenging part is the determination of truly comparable companies.

    Read more-https://theintactone.com/2019/09/17/bkba-u4-topic-1-valuation-of-stocks/


Accounting Treatment of Depreciation

  • Accounting for depreciation requires a continuous series of entries to charge the expense on a certain asset and ultimately derecognize it. These entries are designed to show the ongoing use of fixed assets over time.
  • Depreciation is a gradually increasing charge on the cost of an asset over its expected useful life. The reason for using depreciation to gradually reduce the recorded cost of a fixed asset is to recognize a portion of the asset’s expense at the same time the company records that revenue. Which was generated by real estate. Thus, if you charged the entire fixed asset cost to expense in a single accounting period, but it continued to generate revenue years into the future, this would be an improper accounting transaction under the matching principle, because the revenue would not be matched. Related expenses are being incurred.
  • In reality, revenue may not always be directly tied to a specific real estate asset. Instead, they can be more easily linked to an entire system of production or group of assets.
  • The journal entry for depreciation may be one simple entry designed to accommodate all types of fixed assets, or it may be divided into separate entries for each type of fixed assets.

Accounting Treatment of Depreciation

  • The basic journal entry for depreciation is to debit the depreciation expense account (which appears in the income statement) and credit the accumulated depreciation account (which appears in the balance sheet as a contra account that reduces the amount of the fixed asset. of assets) over time, the accumulated depreciation balance will continue to build up as more depreciation is added to it, Increases until it equals the original cost of the asset. At that time, stop recording any depreciation expenses, since the cost of the asset is now zero.
  • For example, ABC Company calculates that its depreciation expense in the current month should be $25,000. The entry is:

  • Over the next month, ABC’s controller decides to show a higher level of accuracy at the expense account level, and instead elects to split the $25,000 of depreciation among different expense accounts, so that each class of asset is charged a different depreciation. . The entry is:

 Treatment of Depreciation Accounting 

  • Depreciation is considered an expense, but unlike most expenses, there is no associated cash outflow. This is because the net cash outflow is the full amount of the company’s asset when the asset was originally purchased, so there is no further cash-related activity. An exception is a capital lease, where the company records it as an asset when it is acquired but pays for the asset over time under the terms of the related lease agreement.
  • Finally, the purpose of depreciation is not to reduce the cost of a fixed asset below its market value. Market value can vary significantly, and may even increase over time. Instead, the purpose of depreciation is simply to gradually expense the cost of a fixed asset over its useful life.
  • Depreciation and many other accounting functions make it inefficient for the accounting department to properly track and account for fixed assets. They minimize this labor by using capitalization limits to limit the number of expenses classified as fixed assets. 

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By Atul Kakran

My name is Atul Kumar. I am currently in the second year of BCA (Bachelor of Computer Applications). I have experience and knowledge in various computer applications such as WordPress, Microsoft Word, Microsoft Excel, PowerPoint, CorelDRAW, Photoshop, and creating GIFs.

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