Valuation Techniques

A

The prefix 'micro' suggests that such techniques uses formulaic or hypothetical models to predict future market values rather than judging by broad-based economic indicators.

The correct answer is C. Fundamental.

Fundamental techniques estimate future market values by applying basic valuation models to equity markets. These techniques focus on analyzing the fundamental factors that drive the value of a company, such as its financial statements, industry trends, competitive position, and economic factors.

Fundamental analysis involves a detailed examination of a company's financial statements, including its income statement, balance sheet, and cash flow statement. By analyzing these statements, analysts can assess the company's profitability, financial health, and ability to generate cash flows.

Fundamental analysts also consider macroeconomic factors, such as interest rates, inflation, and overall market conditions, as these factors can impact the valuation of companies and the broader equity markets.

Some common valuation models used in fundamental analysis include:

1. Discounted Cash Flow (DCF) Analysis: This model estimates the intrinsic value of a company by discounting its projected future cash flows to their present value. It considers the time value of money and provides a comprehensive assessment of the company's value based on its expected future performance.

2. Price/Earnings (P/E) Ratio Analysis: The P/E ratio compares a company's stock price to its earnings per share (EPS). It is a widely used valuation metric that helps investors assess the relative value of a company's stock. A higher P/E ratio may indicate that the market expects higher future earnings growth.

3. Price/Book (P/B) Ratio Analysis: The P/B ratio compares a company's stock price to its book value per share. The book value represents the net asset value of the company, which is calculated by subtracting liabilities from assets. The P/B ratio helps investors evaluate whether a stock is overvalued or undervalued relative to its book value.

4. Dividend Discount Model (DDM): This model estimates the value of a company's stock based on the present value of its expected future dividend payments. It is commonly used for valuing dividend-paying stocks.

Overall, fundamental techniques provide a systematic approach to estimate the future market values of equities based on analyzing a company's financial performance, industry dynamics, and broader economic factors. By using these techniques, investors can make informed decisions about buying, selling, or holding stocks in the equity markets.