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NISM Certifications · NISM-Series-XV: Research Analyst

Valuation Principles for NISM Research Analyst Exam

Valuation principles are the methods a research analyst uses to estimate what a security or business is worth. You discount future cash flows or dividends at a required return, or compare the firm with peers using multiples. To solve questions, identify the method, pick the right cash flow and discount rate, then calculate carefully.

What this chapter covers

This chapter teaches you how to turn forecasts into a value per share. It starts with time value of money, because every method discounts future amounts. It then builds the discount rate (cost of equity and WACC) and applies it in DCF models (FCFF and FCFE) and dividend discount models.

The chapter also covers relative valuation, where you compare multiples such as P/E, P/B, EV/EBITDA and others with peers, and asset-based approaches that value what the firm owns less what it owes. Expect both concept questions and short calculations.

This chapter connects to the rest of the paper. Company Analysis - Financial Analysis gives you the numbers (earnings, cash flow, debt) that feed these models. Fundamentals of Risk and Return supplies the ideas behind cost of equity. Qualities of a Good Research Report expects your valuation to be justified and its assumptions stated.

Valuation Principles carries 12 marks in the NISM-Series-XV chapter weightage, one of the larger chapters in the paper. The exam is multiple choice with negative marking of 25% of the marks assigned to a question, so a wrong guess costs you. Many questions here are calculation-based and have one exact answer, so a clear method earns marks reliably. The ideas also help you in case-based questions, where you may need to pick the right model or discount rate from given data.

Valuation Principles: topics in the order to study them

  1. 1Time Value of Money and DiscountingEvery valuation method rests on present value, so master this first.
  2. 2Cost of Equity and WACCYou need the discount rate before you can apply any cash flow model.
  3. 3Discounted Cash Flow Valuation (FCFF and FCFE)It combines discounting with the rate, and links FCFF to WACC and FCFE to cost of equity.
  4. 4Dividend Discount ModelsThese are simpler cash flow models, easier once you know DCF and cost of equity.
  5. 5Relative Valuation MultiplesMultiples use a different logic, so study them after the intrinsic methods to compare approaches.
  6. 6Asset-Based and Other Valuation ApproachesThis is the shortest, mostly conceptual topic, best left for last as a contrast to the others.

How to prepare Valuation Principles

Treat this chapter as one chain: cash flow, discount rate, value. Practise the calculations by hand until the steps are automatic.

  1. Learn present value and future value formulas and solve a few examples each, including annuities and perpetuities.
  2. Write the cost of equity and WACC formulas from memory, then match each to the cash flow it discounts: FCFF with WACC, FCFE with cost of equity.
  3. Practise a simple two-stage DCF with a terminal value, and check each step of the arithmetic.
  4. Solve dividend discount model questions, noting the condition that the discount rate must exceed the growth rate for the constant growth model.
  5. Make a one-page table of multiples: what each measures, when it suits, and when it misleads (for example negative earnings).
  6. Revise asset-based approaches as definitions and limits, then attempt timed MCQs and review every wrong answer.

Common mistakes in Valuation Principles

  • Using WACC to discount FCFE, or cost of equity to discount FCFF.

    Fix: Pair them every time: FCFF with WACC for the whole firm, FCFE with cost of equity for shareholders.

  • Using the current dividend instead of next year's dividend in the constant growth formula.

    Fix: Compute D1 = D0 × (1 + g) first, then divide by (ke − g).

  • Using pre-tax cost of debt in WACC.

    Fix: Use cost of debt × (1 − tax rate) unless the question states it is already after tax.

  • Comparing multiples across unlike companies or sectors.

    Fix: Compare only peers with similar growth, risk and business, and check that numerator and denominator match.

  • Mismatching periods and rates, such as an annual rate with quarterly cash flows.

    Fix: Convert the rate and number of periods to the same time unit before discounting.

  • Guessing on calculation questions after a partial attempt.

    Fix: Use option elimination, check the size of the answer for sense, and skip if you cannot narrow it down.

Last-day revision: Valuation Principles

  • Present value = future value ÷ (1 + r)ⁿ.
  • A perpetuity's value = cash flow ÷ r.
  • A growing perpetuity's value = next year's cash flow ÷ (r − g), valid only when r > g.
  • FCFF is discounted at WACC and gives firm value; subtract debt to reach equity value.
  • FCFE is discounted at cost of equity and gives equity value directly.
  • WACC = weights of equity and debt times their costs, with debt cost taken after tax.
  • Gordon growth model: value = D1 ÷ (ke − g), where D1 is next year's dividend.
  • Terminal value often forms a large share of DCF value, so it is sensitive to assumptions.
  • P/E = price ÷ earnings per share; compare it only with similar companies.
  • EV includes debt, so EV multiples are compared with firm-level measures like EBITDA, not with per-share earnings.
  • Asset-based methods value assets less liabilities and may ignore future earning power.
  • Read each question for the exact rate, period and cash flow before calculating.

Valuation Principles practice questions

Valuation Principles in other exams

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

Valuation Principles: frequently asked questions

Is Valuation Principles calculation-heavy in NISM Research Analyst?

It has a mix of concept and calculation questions. Expect present value, WACC, constant growth dividend and multiple-based problems. Practise by hand, since the exam is MCQ-based with exact options.

How many marks does Valuation Principles carry in NISM-Series-XV?

The chapter weightage for Valuation Principles is 12 marks out of 100 in the revised exam. Company Analysis - Financial Analysis also carries 12, and Technical Analysis carries 15.

What should I study first in this chapter?

Start with time value of money and discounting. Then learn cost of equity and WACC, as they feed into DCF and dividend models.

Is there negative marking in the Research Analyst exam?

Yes. NISM-Series-XV has negative marking of 25% of the marks assigned to a question. Avoid blind guesses, and attempt a question when you can eliminate at least some options.