Task 1)

Undervalued stocks:

Undervalued is a financial term referring to a security or other type of investment that is selling
for a price presumed to be below the investment's true intrinsic value. An undervalued stock can
be evaluated by looking at the underlying company's financial statements and analyzing its
fundamentals, such as cash flow, return on assets, profit generation and capital management, to
determine the stock's intrinsic value. Buying stocks when they are undervalued is a key
component of famed investor Warren Buffett's investing strategy.

For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash
flows, then it is an undervalued stock.

Overvalued stocks:

An overvalued stock has a current price that is not justified by its earnings outlook, known as
profit projections, or its price-earnings (P/E) ratio. Consequently, analysts and other economic
experts expect the price to drop eventually.

Overvaluation may result from an uptick in emotional trading, or illogical, gut-driven decision-
making, that artificially inflates the stock's market price, or from deterioration in a company's
fundamentals and financial strength. Potential investors strive to avoid overpaying for stocks.

Overvalued stocks are securities that trade higher than their fair market value, i.e. the value that
the company’s fundamentals, such as earnings or revenues justify. Normally, overvalued
securities are good “sell” opportunities.

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Going long market:

A long position—also known as simply long—is the buying of a stock, commodity, or currency
with the expectation that it will rise in value. Holding a long position is a bullish view.

Long position and long are often used In the context of buying an options contract. The trader
can hold either a long call or a long put option, depending on the outlook for the underlying asset
of the option contract.

Going long on a stock or bond is the more conventional investing practice in the capital markets,
especially for retail investors. An expectation that assets will appreciate in value in the long run
—the buy and hold strategy—spares the investor the need for constant market-watching or
market-timing, and allows time to weather the inevitable ups and downs. Plus, history is on one's
side, as the stock market inevitably appreciates, over time.

Going short the market:

Short selling is an investment or trading strategy that speculates on the decline in a stock or other
securities price. It is an advanced strategy that should only be undertaken by experienced traders
and investors.

Traders may use short selling as speculation, and investors or portfolio managers may use it as a
hedge against the downside risk of a long position in the same security or a related one.
Speculation carries the possibility of substantial risk and is an advanced trading method. Hedging
is a more common transaction involving placing an offsetting position to reduce risk exposure.

In short selling, a position is opened by borrowing shares of a stock or other asset that the
investor believes will decrease in value by a set future date—the expiration date. The investor
then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed
shares must be returned, the trader is betting that the price will continue to decline and they can
purchase them at a lower cost. The risk of loss on a short sale is theoretically unlimited since the
price of any asset can climb to infinity.

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Equity valuation multiples:

Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio
of another, in order to make different companies more comparable. Multiples are the proportion
of one financial metric (i.e. Share Price) to another financial metric (i.e. Earnings per Share). It is
an easy way to compute a company’s value and compare it with other businesses.  Let’s examine
the various types of multiples used in business valuation.

1 Equity multiples

1) P/E Ratio – the most commonly used equity multiple; needed data is easily accessible;
computed as the proportion of Share Price to Earnings Per Share (EPS)

2) Price/Book Ratio – useful if assets primarily drive earnings; computed as the proportion
of Share Price to Book Value Per Share

3) Dividend Yield – used for comparisons between cash returns and investment types;
computed as the proportion of Dividend Per Share to Share Price

4) Price/Sales – used for firms that make losses; used for quick estimates; computed as the
proportion of Share Price to Sales (Revenue) Per Share

2 Enterprise Value (EV) multiples?

When decisions are about mergers and acquisitions, enterprise value multiples are the
appropriate multiples to use. The list below shows some common enterprise value multiples used
in valuation analyses.

 EV/Revenue – slightly affected by differences in accounting; computed as the proportion

 EV/EBITDAR – most used in industries in the hotel and transport sectors; computed as
the proportion of Enterprise Value to Earnings before Interest, Tax, Depreciation &
Amortization, and Rental Costs
  EV/EBITDA – EBITDA can be used as a substitute of free cash flows; most used
enterprise value multiple; computed as the proportion of Enterprise Value to Enterprise
value / Earnings before Interest, Tax, Depreciation & Amortization

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Task4)

Enterprise value multiple is the comparison of enterprise value and earnings before interest,
taxes, depreciation and amortization. This is a very commonly used metric for estimating the
business valuations. It compares the value of a company, inclusive of debt and other liabilities, to
the actual cash earnings exclusive of the non-cash expenses.

This ratio is also known as “EV/EBITDA ratio” and “EBITDA multiple”. Enterprise multiple
can be used to compare the value of one company to the value of another company within the
same industry. A lower enterprise multiple can be indicative of undervaluation of a company.

Calculation (formula)

Enterprise value multiple is calculated by dividing the enterprise value (EV) by the earnings
before interest, taxes, depreciation, and amortization (EBITDA). This can be written as

Enterprise value multiple = Enterprise Value / EBITDA

Enterprise value multiple is a better measure than the P/E ratio because it is not affected by the
changes in the capital structure. Consider a scenario in which a company raises equity finance
and uses these funds to repay the loans. This will usually result in lower earnings per share (EPS)
and therefore a higher P/E ratio. But the Enterprise value multiple will not be affected by this
change in capital structure. This means that Enterprise value multiple cannot be manipulated by
the changes in capital structure. Another benefit of Enterprise value multiple is that it makes
possible fair comparison of companies with different capital structures.

Another positive point about the Enterprise value multiple is that it removes the effects of non-
cash expenses such as depreciation and amortization. These non-cash items are of less
significance to the investors because they are ultimately interested in the cash flows.
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