Strategic Financial Management · Fundamental Analysis and Technical Analysis

Company Analysis and Equity Valuation for CMA Final SFM

Updated 11 October 2026 · Fact-checked

Company analysis checks a firm's financial statements, ratios and earnings to judge its strength. Equity valuation turns that into an intrinsic value per share. To solve a problem, find the required return, forecast dividends or earnings, apply a dividend discount model or P/E multiple, then compare value with market price to decide buy, hold or sell.

Understand Company Analysis and Equity Valuation

Fundamental analysis of a company asks one question: what is this share really worth? You study the business, its financial statements, its growth and its risk. Then you convert that view into a number called intrinsic value.

Company analysis has two parts. The first is qualitative: management quality, competitive position, product mix and governance. The second is quantitative: profitability ratios (net margin, ROE), leverage ratios (debt-equity, interest cover), efficiency ratios and earnings quality. In the exam you mostly get the quantitative part, with figures given.

Valuation then follows two broad routes. The dividend discount approach says a share is worth the present value of the dividends you expect to receive, discounted at the required return (ke), usually from CAPM. The earnings multiple approach says a share is worth its EPS times a suitable P/E ratio, where the P/E is taken from comparable firms or the industry.

The decision rule is simple. If intrinsic value is above market price, the share is undervalued, so buy. If it is below, the share is overvalued, so sell or avoid. If they are close, hold. The growth rate in these models often comes from the retention ratio times ROE: g = b × r.

Every model rests on assumptions. The constant growth model needs ke greater than g and stable growth forever. Multi-stage models relax this by allowing a high-growth phase followed by a stable phase.

Key rules to remember

Intrinsic value, general DDM: P₀ = Σ Dₜ ÷ (1 + ke)ᵗ + Pₙ ÷ (1 + ke)ⁿ; Use when dividends vary year by year and a sale price at year n is given.
Gordon (constant growth) model: P₀ = D₁ ÷ (ke − g) = D₀ × (1 + g) ÷ (ke − g); Valid only when ke > g and growth is constant forever. Check whether the given dividend is D₀ or D₁.
Zero growth model: P₀ = D ÷ ke; Dividend stays flat forever, as with a perpetuity.
Sustainable growth rate: g = b × r, where b = retention ratio = 1 − payout ratio and r = ROE (or return on retained earnings); Use when growth is not given but retention and ROE are.
Cost of equity by CAPM: ke = Rf + β × (Rm − Rf); Use when ke is not given directly.
P/E valuation: Value per share = EPS × P/E ratio; EPS = earnings available to equity ÷ number of equity shares.
P/E ratio: P/E = Market price ÷ EPS; Its inverse, EPS ÷ price, is the earnings yield.
Terminal value in multi-stage DDM: Pₙ = Dₙ₊₁ ÷ (ke − g₂); Discount Pₙ back n years at ke, then add it to the PV of the high-growth dividends.
Justified P/E under constant growth: P/E = Payout ratio × (1 + g) ÷ (ke − g), using EPS₀; or Payout ratio ÷ (ke − g), using EPS₁; Match the formula to whether EPS is current or next year's.

How to solve Company Analysis and Equity Valuation questions

Use this order for any valuation question. It keeps your working clean and helps examiners award step marks.

1Read what is given: dividend or EPS, growth, required return, beta, payout, ROE, and whether the figure is D₀ or D₁.
2Find ke. If it is not given, compute it by CAPM: Rf + β × (Rm − Rf).
3Find g. If it is not given, compute it as retention ratio × ROE.
4Choose the model: constant growth for stable growth, multi-stage if growth changes, P/E if earnings and a multiple are given.
5Do the calculation in stages. For multi-stage, list each year's dividend, discount it, then add the terminal value discounted to today.
6Compare intrinsic value with market price and state the conclusion: undervalued, overvalued or fairly valued.
7Write the recommendation in one line and state any assumption, such as constant growth or ke > g.

Quickest way: Gordon model shortcut with a quick check

When to use it: Use when growth is stated as constant and you need the value or the implied return fast.

Write D₁ first. If D₀ is given, multiply by (1 + g).
Subtract g from ke and divide D₁ by the result.
Check ke > g. If not, the model does not apply.
Compare with market price and give the buy or sell call.
To find the implied return instead, rearrange: ke = D₁ ÷ P₀ + g.

Common mistakes in Company Analysis and Equity Valuation

Using D₀ directly in the Gordon formula.
The formula looks like it takes the dividend just paid.
Fix: The numerator is the next dividend, D₁. If D₀ is given, compute D₀ × (1 + g) first.
Applying the constant growth model when ke is not greater than g.
Students plug numbers in without checking.
Fix: Always compare ke and g first. If g ≥ ke, the model gives a meaningless value.
Computing g as ROE alone or as the payout ratio.
Confusion between retention and payout.
Fix: Use g = retention ratio × ROE. Retention = 1 − payout.
Forgetting to discount the terminal value in multi-stage problems.
Students compute Pₙ and add it directly.
Fix: Discount Pₙ by (1 + ke)ⁿ using the same year as the last high-growth dividend.
Using total earnings instead of EPS in P/E valuation.
Number of shares is hidden in the data.
Fix: Deduct preference dividend, then divide by the number of equity shares to get EPS before applying P/E.
Stopping at a number with no conclusion.
Focus on calculation over decision.
Fix: End with a clear statement comparing intrinsic value with market price and the action to take.

Worked examples

Example 1

Rohan Textiles Ltd paid a dividend of ₹4 per share last year. Dividends are expected to grow at 6% a year forever. The risk-free rate is 7%, the market return is 13% and the beta of the share is 1.2. The market price is ₹60. Find the intrinsic value and advise whether to buy.

Show the solution

Find ke by CAPM: ke = 7% + 1.2 × (13% − 7%) = 7% + 7.2% = 14.2%.
D₀ = ₹4, so D₁ = 4 × 1.06 = ₹4.24.
Check ke > g: 14.2% > 6%, so the model applies.
P₀ = 4.24 ÷ (0.142 − 0.06) = 4.24 ÷ 0.082 = ₹51.71 (approx.).
Compare: intrinsic value ₹51.71 is below market price ₹60.

Answer: Intrinsic value is about ₹51.71. The share is overvalued by about ₹8.29, so do not buy; an existing holder should consider selling.

Example 2

Meera Pharma Ltd has net profit of ₹2,40,00,000 and 12,00,000 equity shares, with no preference shares. Comparable pharma companies trade at a P/E of 15. The company's current market price is ₹260. Find the value per share by the P/E method and state whether the share is under or overvalued.

Show the solution

EPS = ₹2,40,00,000 ÷ 12,00,000 = ₹20.
Value per share = EPS × P/E = 20 × 15 = ₹300.
Compare with market price: ₹300 is above ₹260.
Company's own P/E = 260 ÷ 20 = 13, which is below the peer P/E of 15, which agrees with the conclusion.

Answer: Value per share is ₹300. The share trades at ₹260, so it is undervalued by ₹40 and is a buy, assuming the peer P/E is a fair benchmark.

Exam tips

Underline whether the dividend given is D₀ or D₁ before you write anything. This single check decides many marks.
If ke is not given, look for beta, Rf and Rm in the question and use CAPM.
In multi-stage questions, set out a small table of year, dividend and present value. It makes partial marks easy to award.
Always close with a buy, hold or sell recommendation. Case-based MCQs often test the conclusion, not the arithmetic.
Read the data for hidden steps such as preference dividend, bonus shares or growth derived from retention and ROE.

Practice questions from Fundamental Analysis and Technical Analysis

Company Analysis and Equity Valuation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Company Analysis and Equity Valuation: frequently asked questions

What is the difference between fundamental analysis and intrinsic value?

Fundamental analysis is the process of studying a company's financials, industry and management. Intrinsic value is the result: the per-share worth you derive from that study using a model such as DDM or P/E.

When should I use the P/E method instead of the dividend discount model?

Use P/E when earnings and a comparable multiple are given, or when the firm pays little or no dividend. Use DDM when dividends and growth are given or can be derived.

How do I find growth if the question does not give it?

Use g = retention ratio × ROE. Retention ratio is 1 minus the dividend payout ratio. Check that the problem gives ROE or the return on retained earnings.

Why does the Gordon model fail when g is higher than ke?

The formula divides by ke − g. If g is equal to or above ke, the result is zero, negative or infinite, which has no meaning. Use a multi-stage model instead, where high growth lasts only for a limited period.