REVIEW OF PAPER FUNDAMENTAL ANALYSIS MODELS IN FINANCIAL

MARKETS – Review Study BY Ahmed. S. Wafia, ∗, Hassan Hassana, Adel Mabrouka

This research paper had gave the better understanding about the different models of
stock valuation which are used in fundamental analysis to find the intrinsic value of
shares in this paper searcher has explain 4 models starting from discounted dividend
model to discounted cash flow model illustrated the theoretical foundation for
fundamental analysis model in this paper the researcher has reviewed for models to
calculate the value of stock and present there assumptions of each model and the
advantages and disadvantages of each model separately and discuss the credibility of
all those assumptions which he assume in each model and also tells that how much we
can rely on each model he begins with the dividend discount model and until the
resident income model he come out with shortcomings of all the models if we apply all
the model in the financial market to calculate the value of stock he also suggested that
one must use the latest trend which is follow to calculate the value of stock all those
valuation models are used by fundamental analyst in stock market in order to find the
intrinsic value of shares these analyst compare the fair value with the market value to
determine whether it is good to invest in specific stock or not.
It was mentioned that any assets value is equal to the present value of all expected
future cash flow discounted at the required return.
The various method of stock valuation which are
 Dividend discount model
 Discounted cash flow model
 Residential income and
 The models based upon multiples
According to dividend discount model dividend model is depend on the basic
assumptions which is the stock value is determined by this discounting the expected
dividend future cash this model is used that the company will continue for infinite years
and the model requires that the financial market must be efficient and it is also assume
that the rate of dividend is fixed that means the policy of distributing the different is fixed
so that a correct amount can be easily predicted.
In the next model which is depend on multiples value of stock can be calculated on the
basis of these multiples like price to earnings ratio, price to book value ratio, price to
cash value ratio and price to sales ratio.
In such case it is assumed that form is continuously making profits but if in case a
company is achieving loss then this model cannot be applied and it is also assumed the
financial market is efficient so that one can easily did the value of EPS in future.
Researchers has summarized both the models that is dividend discount model and
model based on multipliers and had concluded that
What if we compare both the above models there are some shortcomings in the
analysis of models different models is characterized by logic but on the other hand
multiplier model is characterized as less accurate and less objective do multiple model
is easy to apply and it is quite common to use but the price earning ratio has be come
the part of the framework of contemporary investment language model it is concluded
that it is difficult to predict future value of dividends as investors consider the capital
gain more than the dividend so didn’t model is not that efficient to value the stock. Thus
they have concluded the dividend model is not worthy.
So now he moves towards the discounted cash flow models for which it is necessary to
have a firm value in order to calculate the value of equity. In this model he assumed that
required rate of return of the stock or we can say the discount rate of the model is
constant, and financial market must be efficient.
And thus concluded discounted cash flow model is better to value the stock because dcf
model includes all the elements of the company which affects the value of company e
that is cash flows of the company and weighted average cost of capital.
Lastly he applied the resident income model where he assumes differently from the
above three models that it is not important that financial market must be efficient.
According to residual model historical data of accounting, earning per share and book
value of share are important to estimate the value of stock.
This method has proved to be the best model than discounted cash flow model as all
other had assumed the efficiency of financial market.
In this paper we really articles of researches or resource studies had been reviewed
and analysis have been done of three main articles in which some writer had criticized
the role of accounting data in valuation of stop on the other hand one had make the
understanding about the financial statements analysis which is useful to value this stock
and the last one had favor the role of accounting data to value the stock. So after these
articles many researches started to test the analytical and experimental relation of the
accounting data and non-accounting data to value the equity firm. And for the studies on
the basis of above three articles based on the developed market and the emerging
markets, resources who research on the development kit had concluded that the focus
on efficiency or inefficiency of the market must be taken care while valuing the stock
through accounting data
in the study of emerging markets various examples of markets has been taken like
Asian capital market Hong Kong stock exchange Korean financial market various
resources has caused by taking such financial markets which are emerging or we can
say are not developed and had concluded that there is a strong significant correlation
when degree of significant 1% of all the companies during the time period which
confirms the ability to use the model of predict future stock prices.
In his study he Thus after considering the all the models it is concluded that it is difficult
to calculate the terminal value for future periods does we can find that it is difficult to use
both the dividend model and discounted cash model flow and concluded the best
models from which we can predict the value of stock or equity is rely on the financial
ratios.
And residual income method had proved that it is useful in the emerging market as this
method was highly depend on the historical accounting data and the book value of
shares. So to evaluate the stock the best model to which we can rely upon is that it
which prove itself that it is both emerging in and developed in financial markets and
doesn’t require efficient market to implement it or in other word it is concluded that to
value the stock dividend and multiples are not effective and the factors which
discounted cash flow model stated by covering the elements of company is least
effective.