Top-down or bottom-up valuation process?

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6 word format

document in English

finance

presentation

published 12/08/2008

review : Completed

level : Advanced

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Summary

Investors typically select investments that provide a rate of return, which compensates them for their time, the expected rate of inflation and the risk involved. In this context, the value of an investment is estimated based on the required rate of return, which is calculated using either the top-down, three-step approach or the bottom-up, stock-picking approach. This paper investigates and compares the top-down and the bottom-up valuation approaches in relation to the investment decision process. Both approaches are used to estimate the rate of return and may be equally used by advocates of fundamental and technical analysis. However, the paper concludes that the top-down, three-step valuation approach is preferable because it considers the aggregate economy and market, it examines global industries and it analyzes individual firms in order to determine the value of the stock.

Keywords: valuation process, top-down valuation approach, bottom-up valuation approach

Abstract.
Introduction.
Determining asset value.
1. Estimating future stream of cash flows.
2. Estimating discount rate.
The top-down, three step valuation approach.
1. Economic environment.
2. Industry environment.
3. Company Analysis.
The bottom-up, stock-picking approach.
Top-down or bottom-up valuation process?
Conclusions.