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CFA Level I · CFA Level I Exam · Introduction to Equity Valuation

An analyst estimates the intrinsic value of a company by discounting its expected future free cash flows to equity at the required return on equity. This approach is best described as:

Discounting expected future free cash flows to equity at the required return is absolute valuation. It derives intrinsic value from the company's own fundamentals rather than from comparison with peers, which is the defining feature of relative valuation.

  1. Arelative valuation
  2. Babsolute valuationCorrect
  3. Casset-based market comparison

Explanation

Absolute valuation models estimate a stock's intrinsic value from its own fundamentals, such as discounted cash flows. Relative valuation instead compares the stock's multiples with those of other companies or benchmarks, so it is not what the analyst is doing here.

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