Equity Valuation

Equity Valuation in CFA Level 2 explores sophisticated methods to determine a company's intrinsic value. The curriculum builds upon Level 1 fundamentals and delves into more complex approaches. The core valuation models covered include: 1. Discounted Cash Flow (DCF) models - Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE) with multi-stage growth assumptions and terminal value calculations. 2. Residual Income models - Focus on economic profit created beyond required returns, incorporating accounting data adjustments. 3. Dividend Discount models - Multi-stage growth models for dividend-paying stocks. 4. Price Multiple methodologies - Advanced applications of P/E, P/B, EV/EBITDA ratios with justifications for premium/discount valuations. 5. Asset-based valuation - Techniques for valuing companies based on adjusted asset values. The curriculum emphasizes forecasting financial statements as inputs to these models, requiring candidates to project income statements, balance sheets, and cash flows. Industry-specific adjustments receive particular attention. Comparative analysis features prominently, teaching candidates to select appropriate peer companies and adjust for differences in size, growth, profitability, and risk. CFA Level 2 also covers special cases including valuation of private companies, financial institutions, distressed firms, and early-stage enterprises. Candidate skills tested include: - Selecting appropriate valuation models for different scenarios - Identifying key value drivers - Making technical adjustments to improve valuation accuracy - Recognizing limitations of each approach - Reconciling different valuation results The equity valuation section typically represents 10-15% of the CFA Level 2 exam, making it one of the most heavily weighted topics.

Equity Valuation in CFA Level 2 explores sophisticated methods to determine a company's intrinsic value. The curriculum builds upon Level 1 fundamentals and delves into more complex approaches. The …

Concepts covered: Free Cash Flow Valuation, Discounted Dividend Valuation, Equity Valuation: Applications and Processes, Private Company Valuation, Residual Income Valuation, Market-Based Valuation: Price and Enterprise Value Multiples