An Examination of Equity-Share Price Valuation Models

Abstract

The problem of equity valuation has engendered long debates and disparate contentions within the field of investment decision-making. However, the problem is by no means limited to the realm of theoretical finance. Equity valuation is a problem for both the firm and the individual investor. From the point of view of the firm, valuation is a ubiquitous concern. In as much as there is little disagreement today that maximization of shareholder wealth is the objective of the firm, valuation becomes the criterion by which to measure the efficacy of the three finance functions. Indeed, the three decisions of investment, financing, and dividends are unified only with reference to this objective. Such problems as capital structure, cost of capital, capital rationing, etc. are so inextricably bound with the matter of valuation that much attention has been directed to casting this subject into a more commodious form. Theindividualtoohasbeenlongconcernedwithequityvaluation, perhapseventoagreaterextentthanthefirm.Tohim,therationale forinvestmentshouldbewealthmaximization.Aswiththefirm,he facesatriumvirateofproblems;unlikethefirm,however,security valuationdoesnotconstitutethepivotalpointofhisdecisions. Instead,athreetieredapproachtoequityinvestmentisrequired