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Chapter 11 - Equity market valuation. This chapter illustrates the application of economic forecasts to the valuation of equity markets. Although many factors interact to determine whether equity prices are currently rising or falling, economic fundamentals will ultimately dictate secular equity market price trends. | Chapter 11 Equity Market Valuation Presenter Venue Date This chapter illustrates the application of economic forecasts to the valuation of equity markets. Although many factors interact to determine whether equity prices are currently rising or falling, economic fundamentals will ultimately dictate secular equity market price trends. Section 2 uses GDP forecasts for a developing country, China, to develop inputs for a discounted cash flow valuation of that country’s equity market. Section 3 contrasts the top-down and bottom-up valuation approaches. Section 4 explains and critiques popular earnings- and asset-based models to relative equity market valuation. Section 5 summarizes the reading. DISCLAIMER: Candidates should understand that this presentation is NOT a substitute for a thorough understanding of the CFA Program curriculum. This presentation is also NOT necessarily a reflection of all the knowledge and skills needed for candidates to successfully complete questions regarding | Chapter 11 Equity Market Valuation Presenter Venue Date This chapter illustrates the application of economic forecasts to the valuation of equity markets. Although many factors interact to determine whether equity prices are currently rising or falling, economic fundamentals will ultimately dictate secular equity market price trends. Section 2 uses GDP forecasts for a developing country, China, to develop inputs for a discounted cash flow valuation of that country’s equity market. Section 3 contrasts the top-down and bottom-up valuation approaches. Section 4 explains and critiques popular earnings- and asset-based models to relative equity market valuation. Section 5 summarizes the reading. DISCLAIMER: Candidates should understand that this presentation is NOT a substitute for a thorough understanding of the CFA Program curriculum. This presentation is also NOT necessarily a reflection of all the knowledge and skills needed for candidates to successfully complete questions regarding this topic area on the CFA exam. 1 Neoclassical Approach to Growth Accounting Cobb-Douglas production function Assuming constant returns to scale, 1 – α = β, and taking the natural logarithm of both sides of first equation gives Taking first differences of second equation and using a property of logarithms results in this approximation: LOS: Explain the terms of the Cobb-Douglas production function and demonstrate how the function can be used to model growth in real output under the assumption of constant returns to scale. Pages 470-471 The neoclassical approach to growth accounting uses the Cobb-Douglas production function. This approach can be useful to financial analysts because it provides insight into the long-term potential economic growth in individual countries, in larger regions, and for the world as a whole. The Cobb-Douglas estimate of the growth of total production can help to estimate corporate profit growth and develop corporate cash flow projections for stock market .
