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Tag Archives: valuations

What is a share price

If you ask the simple question of “what is a share price?” – many people struggle to answer. People will have an opinion on whether the share price of Telecom or Air NZ is too low or too high – but they can’t answer the simple question of “why?”. I usually get an answer about assets – but nothing very specific.

So how does (or should) an investment banker think about the value of a business?

I am going to use a minimum of jargon here – I promise. Please see the glossary page for some definitions of valuation terminology, why various terms are used and more information about the valuation methodology.

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Cartoon Valuation

We are going to cover valuation techniques in a separate post – but here is the Valuation 101 of how investment bankers determine if a share is currently undervalued or overvalued. We use a piece of financial economics called a discounted cash flow (DCF) model. This is a key part of corporate finance. Now value does not always equal price – but as the Benjamin Graham quote goes, “In the short-term, the market is a voting machine and in the long-term a weighing machine”.

The DCF is the primary method in corporate finance theory for calculating value. In corporate finance – value is a DCF…

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