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Absolute Value

What is an 'Absolute Value'

An absolute value is a business valuation method that uses discounted cash flow analysis to determine a company's financial worth. The absolute value method differs from the relative value models that examine what a company is worth compared to its competitors. Absolute value models try to determine a company's intrinsic worth based on its projected cash flows.

Explaining 'Absolute Value'

In addition to looking at ratios such as price to earnings and price to book value, value investors like to calculate what an entire business is worth when they are considering whether to buy a particular stock. Discounted cash flow models are one way to determine this worth. They estimate a company's future free cash flows, then discount that value to the present to determine an absolute value for the company. By comparing what a company's share price should be given its absolute value to the price the stock is actually trading it, investors can determine if a stock is currently under or overvalued.


Further Reading


Financial development, investment, and economic growth
onlinelibrary.wiley.com [PDF]
… There- fore, to mitigate the potential negative ef- fects of finance on economic growth, the government must reform its institutional en- vironment first. So far, empirical studies of the effects of financial development on economic growth have produced mixed evidence …

Performance implications of strategic performance measurement in financial services firmsPerformance implications of strategic performance measurement in financial services firms
www.sciencedirect.com [PDF]
… There- fore, to mitigate the potential negative ef- fects of finance on economic growth, the government must reform its institutional en- vironment first. So far, empirical studies of the effects of financial development on economic growth have produced mixed evidence …

Correlations in economic time seriesCorrelations in economic time series
www.sciencedirect.com [PDF]
… There- fore, to mitigate the potential negative ef- fects of finance on economic growth, the government must reform its institutional en- vironment first. So far, empirical studies of the effects of financial development on economic growth have produced mixed evidence …

Audit‐firm tenure and the quality of financial reportsAudit‐firm tenure and the quality of financial reports
onlinelibrary.wiley.com [PDF]
… There- fore, to mitigate the potential negative ef- fects of finance on economic growth, the government must reform its institutional en- vironment first. So far, empirical studies of the effects of financial development on economic growth have produced mixed evidence …

Sources of contagion: is it finance or trade?Sources of contagion: is it finance or trade?
www.sciencedirect.com [PDF]
… There- fore, to mitigate the potential negative ef- fects of finance on economic growth, the government must reform its institutional en- vironment first. So far, empirical studies of the effects of financial development on economic growth have produced mixed evidence …

Do financing constraints matter for R&D?Do financing constraints matter for R&D?
www.sciencedirect.com [PDF]
… There- fore, to mitigate the potential negative ef- fects of finance on economic growth, the government must reform its institutional en- vironment first. So far, empirical studies of the effects of financial development on economic growth have produced mixed evidence …

Measuring the financial sophistication of householdsMeasuring the financial sophistication of households
pubs.aeaweb.org [PDF]
… There- fore, to mitigate the potential negative ef- fects of finance on economic growth, the government must reform its institutional en- vironment first. So far, empirical studies of the effects of financial development on economic growth have produced mixed evidence …

Opaque financial reports, R2, and crash riskOpaque financial reports, R2, and crash risk
www.sciencedirect.com [PDF]
… There- fore, to mitigate the potential negative ef- fects of finance on economic growth, the government must reform its institutional en- vironment first. So far, empirical studies of the effects of financial development on economic growth have produced mixed evidence …

Least absolute value regression: recent contributionsLeast absolute value regression: recent contributions
www.tandfonline.com [PDF]
… There- fore, to mitigate the potential negative ef- fects of finance on economic growth, the government must reform its institutional en- vironment first. So far, empirical studies of the effects of financial development on economic growth have produced mixed evidence …



Q&A About Absolute Value


What discount rate should be used when calculating free cash flow for companies using this model?

A weighted average cost of capital (WACC) should be used as it takes into account all costs associated with funding operations, including debt and equity financing costs, taxes and other factors affecting investment returns. WACC can vary depending on industry or sector risk levels but typically ranges between 8% and 12%. Discount rates lower than WACC will result in negative NPV; higher discount rates will result in positive NPV but may not reflect realistic future growth prospects or risks associated with investments. Thus, selecting an appropriate discount rate is critical when calculating present values using DCF analysis.

How do you calculate an individual stock’s intrinsic value using this model?

Intrinsic Value = Share Price x (1 + Discount Rate) ^ Number of Years

What does relative value measure?

Relative value measures the attractiveness of one financial instrument over another.

How is relative value measured?

Relative value is measured by comparing a given instrument's risk, liquidity, and return to that of other similar instruments.

Why do asset prices fluctuate so much?

Asset prices fluctuate because they are traded in open markets where supply and demand can change quickly.

What are some examples of assets with fluctuating prices?

Examples include stocks, oil, and gold.

How do you calculate free cash flow for companies using the discounted cash flow model?

Free Cash Flow = Operating Cash Flow - Capital Expenditures - Dividends Paid

What are some ratios used in the absolute value model?

Price-to-earnings and price-to-book ratio are two of the most common ratios used in this model.

What is an absolute value?

An absolute value is a business valuation method that uses discounted cash flow analysis to determine a company's financial worth. The absolute value method differs from the relative value models that examine what a company is worth compared to its competitors. Absolute value models try to determine a company's intrinsic worth based on its projected cash flows.

How does the absolute value differ from relative values?

Relative values examine what a company is worth compared to its competitors, while absolute values try to determine a company's intrinsic worth based on its projected cash flows.

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