Equity Research Analyst

Equity research analysts closely analyze small groups of stocks in order to provide insightful investment ideas and recommendations to the firm. We’ve compiled a list of the most common and frequently asked Equity Research interview questions.

Q.1 What is Equity Research, and what is its primary objective?

Equity Research is the analysis of publicly traded companies and their stocks. Its objective is to provide insights and recommendations to investors and institutions.

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Q.2 How does Equity Research contribute to investment decisions?

It helps investors make informed decisions by evaluating a company's financial health, prospects, and stock valuation.

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Q.3 What is the difference between buy-side and sell-side Equity Research?

Buy-side analysts work for investment firms managing their own funds, while sell-side analysts work for brokerage firms providing research to clients.

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Q.4 Explain the concept of a stock's "intrinsic value" in Equity Research.

Intrinsic value is the estimated true worth of a stock based on its fundamentals, such as earnings, growth prospects, and risk.

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Q.5 What are the key components of financial statements that analysts focus on?

Analysts typically focus on income statements, balance sheets, and cash flow statements to assess a company's financial health.

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Q.6 How is the P/E (Price-to-Earnings) ratio calculated, and what does it indicate?

P/E ratio is calculated by dividing the stock price by earnings per share (EPS) and indicates how much investors are willing to pay for each dollar of earnings.

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Q.7 Describe the role of industry analysis in Equity Research.

Industry analysis assesses the competitive dynamics, trends, and growth prospects of a specific sector or industry.

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Q.8 What is the significance of conducting a SWOT analysis in Equity Research?

SWOT analysis identifies a company's strengths, weaknesses, opportunities, and threats, providing a comprehensive view of its position.

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Q.9 How do analysts assess a company's competitive advantage or moat?

Analysts examine factors like brand recognition, intellectual property, cost leadership, and customer loyalty to identify a company's competitive advantage.

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Q.10 Explain the concept of "margin of safety" in stock valuation.

Margin of safety is the difference between a stock's intrinsic value and its current market price, providing a cushion for potential investment risks.

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Q.11 What are the different valuation methods used in Equity Research?

Common valuation methods include discounted cash flow (DCF), comparable company analysis (CCA), and precedent transactions analysis (PTA).

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Q.12 How do you calculate the Weighted Average Cost of Capital (WACC) in valuation?

WACC considers the cost of debt and equity in a company's capital structure, weighted by their respective proportions.

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Q.13 What is the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin, and how is it used in analysis?

EBITDA margin measures a company's profitability before non-operating expenses and is used to compare profitability across industries.

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Q.14 Describe the role of management interviews and conference calls in Equity Research.

Analysts often interact with company management to gather information on strategy, financial goals, and industry trends.

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Q.15 How do you perform a competitive analysis of a company in Equity Research?

Competitive analysis involves evaluating a company's market share, pricing strategy, product differentiation, and competitive threats.

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Q.16 Explain the concept of "earnings per share (EPS)" in Equity Research.

EPS represents a company's net income divided by the number of outstanding shares, indicating its profitability on a per-share basis.

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Q.17 What are some key financial ratios used in Equity Research, and what do they indicate?

Ratios like the current ratio (liquidity), debt-to-equity ratio (leverage), and return on equity (ROE) provide insights into a company's financial health and performance.

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Q.18 Describe the concept of "free cash flow (FCF)" and its importance in valuation.

FCF is the cash a company generates after covering operating expenses and capital expenditures, crucial for assessing its ability to grow and meet obligations.

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Q.19 How do analysts assess a company's growth prospects in Equity Research?

Growth prospects are evaluated by examining historical growth rates, industry trends, and the company's expansion plans.

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Q.20 What is the significance of conducting a thorough due diligence process in Equity Research?

Due diligence involves verifying the accuracy of financial statements, assessing legal and regulatory compliance, and evaluating risks.

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Q.21 Explain the concept of "bottom-up" and "top-down" approaches in Equity Research.

The bottom-up approach involves analyzing individual companies, while the top-down approach starts with the macroeconomic environment and narrows down to specific sectors or stocks.

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Q.22 How do macroeconomic factors like interest rates impact Equity Research?

Interest rates can affect a company's cost of capital, financing costs, and consumer spending, influencing its valuation.

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Q.23 What is the role of financial modeling in Equity Research?

Financial models use historical data and assumptions to project a company's future financial performance and estimate its value.

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Q.24 Describe the concept of "DCF valuation" (Discounted Cash Flow) in Equity Research.

DCF valuation calculates the present value of a company's expected future cash flows, providing an intrinsic value estimate.

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Q.25 What are the limitations and challenges of Equity Research?

Challenges include data accuracy, market volatility, and the need for continuous monitoring and updates.

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Q.26 In investment banking what is the difference between an associate and an analyst?

In Investment Banking, the role of analyst is the lowest level in the organizational chart. The associate in Investment Banking ranks higher than the analyst, as the analyst usually reports to an associate.

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Q.27 How do analysts incorporate qualitative factors into their research?

Qualitative factors, such as management quality, corporate culture, and brand reputation, are considered alongside quantitative data in analysis.

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Q.28 How much money motivates you?

Motivate is actually a one form of measurement for success. But otherwise not a whole lot. Partly at this point in my life why would I not consider banking as I personally do place a value on my free time and would forgo a potentially bigger payoff via the banking/PE route.

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Q.29 Explain the concept of "event-driven" Equity Research.

Event-driven research focuses on analyzing stocks based on specific events like earnings releases, mergers, or regulatory changes.

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Q.30 What keeps you motivated?

Even if I win the lottery tomorrow, I would still live my life exactly the same. I’m pretty content at the moment so just keeping the course is enough to motivate me for now.

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Q.31 What is the role of financial news and information sources in Equity Research?

Analysts rely on financial news, reports, and databases to stay updated on market developments and company news.

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Q.32 Have you ever considered leaving your job to start your own company?

No, I’m not emotionally attached to the things I do, so for me starting my own business limits my flexibility if I’m financially invested.

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Q.33 Describe an Equity Research Report.

An equity research report refers to a recommendation to clients which convinces them to either BUY, SELL or HOLD equity securities. The preparer must justify each recommendation. This includes the components like: Industry Overview that gives the reader a summary of the trends affecting the industry covering the company Company Financials and Ratio in which the Key metrics are displayed. Valuations and Projections which are based on the financial performance of the company, research attempts for measuring the future value of each share.

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Q.34 How do you assess a company's risk profile in Equity Research?

Risk assessment includes analyzing financial stability, industry risks, market volatility, and geopolitical factors.

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Q.35 What is the difference between an associate and an analyst in equity research?

The associate is the lowest role in the organizational hierarchy, when it comes, to equity research and the associate reports to the analyst.

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Q.36 What do you understand about an earnings season?

Earnings season refers to the time of the year, where companies declare the results of their operations. It is usually in the 2nd quarter of each year.

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Q.37 What is the importance of a research report in Equity Research?

Research reports summarize findings and provide recommendations to investors, helping them make informed decisions.

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Q.38 In the capacity of a research analyst which industries have you worked with?

Here to answer this question, describe the industries you have experienced in the past. Also mention the companies or clients you worked for who are fairly predictable, but be specific no need to detail everything.

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Q.39 Define Enterprise Value and Equity Value.

Equity value and enterprise value are essential when you are using valuations for finding the fair value of stocks. Where Equity Value is typically the total market value of the company’s equity shares. And, Enterprise Value is Equity Value plus Net Debt. In which, Net Debt refers to the total of short-term debt (including a portion of long-term debt), long-term debt, all non-controlling interest, preferred shares, and then deduct cash and cash equivalents.

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Q.40 How can analysts stay objective and avoid conflicts of interest in their research?

Analysts adhere to ethical standards, disclose conflicts of interest, and prioritize the interests of investors.

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Q.41 Tell us a bit about investment analyst reports of equity research?

An advice on whether to buy or sell the securities of specific companies or industries is contained in the reports of the investment analyst. ,
They are usually produced by research analysts employed by firms that may have an interest in selling securities; however, in understanding how investment professionals analyze an industry they can provide a useful model to students and what data points they find of most interest.

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Q.42 Explain the types of standard ratios used in company analysis.

This include: 1. Quick Assets Ratio Solvency Ratios Current Ratio Current Liability to Inventory Total liabilities to net worth 2. Turnover Ratios Accounts Payable Turnover Days Payable Cash Conversion Cycle Inventory Turnover Receivables Turnover Days Receivables Days Inventory 3. Operating Efficiency Ratios Equity Turnover Asset Turnover Ratio Net Fixed Asset Turnover 4. Operating Profitability Ratios Net Margin Return on Total Assets Return on Equity Dupont Model for Return on Equity Gross Profit Margin Operating Profit Margin

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Q.43 Explain the concept of "value investing" and its key principles.

Value investing involves buying undervalued stocks based on fundamental analysis and a margin of safety. Principles include buying low, focusing on intrinsic value, and long-term holding.

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Q.44 Describe the equity research structure?

Equity Research organizational chart is very flat.
There are 3 levels only: Associate, analyst and the Head of Equity Research.
For covering companies in a particular sector each analyst present is responsible. While we illustrate only some of these sectors. In reality, there are many more sectors and sub-sectors as an investment bank can have anywhere from 10 analysts (boutique investment bank) to as many as 60 analysts (big bulge brackets with international operations). Depending on how many companies he covers a single analyst typically has one or two associates.

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Q.45 Explain the process of Discounted Cash Flow.

DCF refers to a valuation method that values a company using its discounted future cash flows. However, the discount rate used is the Weighted Average Cost of Capital. And, discounted Cash flows model is completed generally in six steps: Firstly, compute the discount rate, which is the Weighted Average Cost of Capital Secondly, compute Free Cash Flows that are the discounted cash flows inside the projected period. Thirdly compute Terminal Value that is equal to the discounted cash flows outside the projected period. Then, compute the diluted number of shares After that, compute Equity Value and Enterprise Value Lastly, compare the estimated fair value and market value, then recommend either BUY, SELL or HOLD.

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Q.46 What is the role of technical analysis in Equity Research?

Technical analysis examines historical price and volume data to identify trends and potential entry or exit points for stocks.

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Q.47 In equity research describe the structure of an investment banking?

The industry groups and product groups usually organize the Investment banking function. Industry groups are essentially sectors, such as Consumer Products, industrial, Financials, Energy, and others. Product groups include functions like ECM, DCM and M&A and serve companies in all sectors.
The role of the analyst is of the lowest level.

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Q.48 What is the process for Comparable Companies Analysis?

Comparable companies' analysis can be defined as comparing one share over other shares in the same industry using valuation multiples. This method can be done using the steps: Firstly, gather financial information about the company. This is usually composed of the three primary financial statements. Secondly, project the income statements to 3 years, five years, or more. Thirdly, compute the Equity and Enterprise Value Then, determine the total number of diluted shares After that, compute forecasts and valuation multiples Next, depending on the valuation multiples, compute the fair value of each share. Lastly, examine results and make recommendations.

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Q.49 Describe the concept of "equity research coverage" and its scope.

Equity research coverage refers to the number of stocks or sectors an analyst or firm follows and provides insights into specific areas of expertise.

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Q.50 For an equity research analyst which skills are needed?

It is necessary to possess higher analytical abilities.
You need to have strong understanding of accounts and financial fundamentals as most of the time, what you are doing are crunching numbers! Apart from this, knowledge about global and local business is an added advantage.
You should know about capital markets and their function.
The equity analyst also needs to be a good communicator.
Since all the financial analysis needs to be presented in the form of reports and/or case studies, strong writing skills is a must.
Possessing correct judgment goes with the job, as an equity researcher.

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Q.51 Define Free Cash Flows.

Free Cash Flows can be defined as the cash available to debt and equity security holders after deducting all outflows related to working capital and Capex. Further, for computing free cash flows: Firstly, begin with the after-tax net income Then, add back all non-cash expenses Thirdly, deduct all non-cash income Next, a decrease in assets must be deducted because they reduce cash but do not affect net income. The opposite happens when assets increase. Lastly, an increase in payables decreases cash but does not affect net income, and so, we must deduct it. The opposite has the opposite effect.

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Q.52 How do you incorporate risk assessment into a DCF valuation model?

Risk assessment involves adjusting discount rates or incorporating risk factors into cash flow projections to account for uncertainty.

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Q.53 What skills are important for a research analyst?

Being painstakingly detail-oriented is crucial. Strong math is also of utmost importance. if a person is to be able to interpret the market and company performance analytical skills have to be top-notch. Because a research analyst communicates with clients and target industries and prepares reports regularly and communication skills are important.

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Q.54 Define Free Cash Flow to Equity.

Free Cash Flows to Equity can be defined as the amount of cash that is available to equity shareholders after deducting all expenses related to capital outlays, debts and taxes.

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Q.55 Explain the concept of "price-earnings growth (PEG) ratio" in Equity Research.

The PEG ratio compares a stock's P/E ratio to its expected earnings growth rate, helping assess its valuation relative to growth prospects.

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Q.56 Describe the typical research process.

Typically, an analyst focuses on a specific company or industrial segment, researches its economic performance, and documents it in the form of a report. The report is presented to the company management who then decides oh how to improve the services.

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Q.57 Explain the term Sensitivity Analysis.

Sensitivity analysis is the method for determining the effect of an independent variable on other dependent variables.

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Q.58 How is the concept of "dividend yield" used in Equity Research?

Dividend yield measures the annual dividend income a stock provides relative to its price, making it important for income-oriented investors.

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Q.59 Please give the examples of the type of analysis you do?

Here to answer this question, Review analyses you’ve been experienced with, such as:
Product and scenario analysis or analysis of economic performance.

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Q.60 What is the role of Sensitivity Analysis in Equity Research?

Sensitivity is used in Equity Research in many ways like: Firstly, rather than assuming a single scenario, a range of scenarios of factors is being investigated. Secondly, independent variables that are often used are discount rates, growth rates, or Sales. Next, the recommendations are not dependent on a single scenario but a range of scenarios that could take place considering their possibility ratios. Lastly, sensitivity analysis is presented using a sensitivity analysis table via DATA tables in Excel.

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Q.61 Describe the concept of "analyst consensus" in Equity Research.

Analyst consensus represents the average recommendations and price targets of various analysts covering a stock.

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Q.62 Please tell us about the characteristics of a successful research analyst?

Research analysts are typically highly-motivated proactive professionals who are out to make a difference. They are fast-paced, adaptable, dynamic, and demonstrate initiative. They are strong team players, have a passion for technology, and think creatively.

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Q.63 Define the term Beta.

Beta refers to the measure of a stock price’s sensitivity to changes in the stock market. This is derived using historical figures using regression analysis. However, a beta of 1 means that it moves equally proportionated to the movement of the stock market. And, if the beta is lower than one means that it is less volatile, or less movement than the stock market movement. Lastly, if it is higher than 1 means that its price is more volatile than the market.

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Q.64 What is the role of regulatory compliance and ethical standards in Equity Research?

Analysts must adhere to regulations like MiFID II and maintain ethical standards to ensure accurate and unbiased research.

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Q.65 What is the company’s viewpoint on dividend and buyback policies?

An Equity Analyst must know if the capital allocation in the company an optimal mix is being followed. To throw light on its motive behind the buyback if the company wants to buy back, the analyst can ask the management. As for dividend, the analyst needs to see whether the company is following a dividend policy in tune with its nature and performance.

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Q.66 What does unlevering a beta mean?

For unlevering a beta means that to eliminate the effect of debt of the company to the movements of the stock’s price. However, unlevering data means that you only want stockholder’s equity to affect it. And, unlevered beta is assumed to be a more accurate measure of a stock’s volatility due to the removal of the effect of debt securities. Further, unlevered data is calculated by: UnLevered Beta = Levered Beta / (1 + ((1 – Tax Rate) x (Total Debt/Equity)))

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Q.67 How do analysts assess a company's corporate governance in Equity Research?

Corporate governance analysis evaluates a company's board structure, executive compensation, and transparency in decision-making.

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Q.68 What are the lesser known factors that can impact the stock going forward?

This is a very direct question, wherein the analyst would like to know about every other factor that can impact the performance of the stock going forward. There are factors only the management of the company can throw light upon, which otherwise the analyst would miss out. The analyst can articulate the question and get information on such lesser known facts. This could be anything ranging from economy, technology, sector, product or company specific factors.

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Q.69 Can a stock have an Equity Value that is higher than its Enterprise Value?

Yes, depending on the formula Enterprise value = total equity market value + Gross Debt less Cash, Equity value is higher when it has no interest-bearing debt but has cash.

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Q.70 Explain the concept of "cash conversion cycle" and its relevance in Equity Research.

The cash conversion cycle measures the time it takes for a company to convert investments in inventory and receivables into cash, affecting its liquidity and working capital management.

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Q.71 What is your philosophy on Mergers & acquisitions (M&A)?

For a company mergers and acquisitions is a crucial event. An Equity Analyst can ask the management about his views on M&A, with respect to the sector that the company belongs to, capability of execution team for M&A, its readiness for consolidation, its criterion to target companies, etc.
The answers will help an analyst to deduce whether the company can hold its position in the market on its own or does it want to grow through the inorganic way.

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Q.72 How to calculate the terminal value in a Discounted Cash Flow.

Terminal value refers to the present value of all cash flows beyond the projected period. It is commonly calculated using the Gordon growth model or using exit multiples.

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Q.73 What is the role of scenario analysis in Equity Research?

Scenario analysis explores various economic and market scenarios to assess a company's resilience and potential outcomes.

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Q.74 How do you plan to tackle the current wave of technology disruption?

Technology disruption is one of the biggest truths today and companies have to prepare themselves for it. When analysing a company prone to technology disruption, the management needs to be asked whether it is aware of these changes.
Technology disruption has a short-term negative and long-term positive impact in most cases.
The management should be able to answer how it is going to hedge itself against the near-term losses and capitalize the gains in future. The analyst also needs to judge how optimistic and well prepared the company is to adopt new technologies.

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Q.75 Differentiate between Fundamental Analysis and Technical Analysis.

Fundamental analysis uses extensive analysis of financial statements, non-financial data, and external factors for determining the future price of the stock. Whereas, the technical analysis simply analyzes the stock chart in an attempt for finding trends and patterns that will determine the future value of the stock.

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Q.76 How can analysts assess the impact of industry disruptions or technological advancements in their research?

Analysts study industry trends, innovation, and competitive dynamics to anticipate the effects of disruptions or technological changes.

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Q.77 What is the importance of ESG (Environmental, Social, Governance) factors in Equity Research?

ESG factors provide insights into a company's sustainability, risk management, and long-term viability.

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Q.78 Explain the concept of "target price" in Equity Research.

A target price is an analyst's estimated future price for a stock based on their valuation and research.

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Q.79 How do you evaluate the competitive positioning of a company in Equity Research?

Competitive positioning considers a company's market share, market growth, product differentiation, and competitive advantages.

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Q.80 Describe the concept of "earnings quality" in Equity Research.

Earnings quality assesses the reliability and sustainability of a company's reported earnings.

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Q.81 How do you analyze a company's capital structure and debt levels in Equity Research?

Analysis includes evaluating debt-to-equity ratios, interest coverage, and the impact of debt on financial stability.

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Q.82 What is the role of economic indicators in Equity Research?

Economic indicators, such as GDP growth, inflation rates, and unemployment, provide insights into the broader economic environment and can affect stock performance.

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Q.83 Explain the concept of "discounted cash flow sensitivity analysis" in Equity Research.

Sensitivity analysis assesses how changes in key assumptions, such as growth rates or discount rates, impact the DCF valuation.

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Q.84 How do analysts assess the impact of government policies and regulations on a company's prospects in Equity Research?

Analysts study policy changes, tax reforms, and regulatory developments to gauge their impact on a company's operations and profitability.

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Q.85 What is the significance of cash flow analysis in Equity Research?

Cash flow analysis evaluates a company's ability to generate cash from its core operations and assesses its liquidity and solvency.

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Q.86 How do analysts incorporate risk assessment into their investment recommendations?

Risk assessment influences recommendations by assigning risk ratings and helping investors understand the potential downsides of an investment.

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Q.87 What motivates you to excel in the field of Equity Research?

Personal motivation may include a passion for analyzing financial markets, helping investors make informed decisions, and staying updated on economic trends.

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Q.88 What does solvency implies?

Solvency implies the ability of a business to pay back its short term and long term debts to its creditors

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Q.89 Explain Gordon Growth model.

Gordon Growth determines the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate

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Q.90 What is indicated if, in last year the current ratio was 3:1 and quick ratio was 2:1.Presently current ratio is 3:1 but quick ratio is 1:1.

This situation indicates higher stock

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Q.91 What is the purpose of equity research ?

1. To identify the intrinsic value of an asset or security 2. To provide a better insight over the fluctuations of the equity market 3. To aid in the investors in the process of achieving desired financial objectives

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Q.92 Blue chips are issued by which type of companies?

Blue chips are type of stocks, issued by large, well established companies which are considered to be safe and in good financial shape

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Q.93 What are the duties of an equity research analyst?

1. Researching market financial conditions 2. Preparing the financial models and statistics 3. Updating the statistical data and financial models

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Q.94 If a company revalues its assets then what will be the effect on net worth?

Net worth will improve

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Q.95 Give the difference between an associate and an analyst in Investment Banking?

The analyst role is considered to be the lowest level in the organizational chart, in Investment Banking,. Such that the analyst generally reports to an associate, and therefore the associate profile in Investment Banking ranks higher than the analyst.

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Q.96 Brief about Investment Analyst Reports of Equity Research?

The investment analyst reports provides advice whether to buy or sell the securities of specific companies or industries. Investment Analyst report are produced by research analysts employed by firms with interest in selling securities; but they can offer a useful model in understanding how investment professionals analyse an industry and what data points they find of interest.

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Q.97 Describe the equity research structure?

Equity Research organizational chart are extremely flat with only 3 levels - Associate, Analyst and the Head of Equity Research. Such that each analyst is responsible for covering companies in a particular sector. In real-time there are many more sectors and sub-sectors as an investment bank can have anywhere from 10 analysts to as many as 60 analysts. A single analyst typically has one or two associates based on the number of companies it covers.

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Q.98 What are the skills required to become an Equity Research Analyst?

Some of the most crucial skills needed are - 1. Must possess higher analytical abilities. 2. Must have strong understanding of accounts and financial fundamentals. 3. Must have knowledge about global and local business is an added advantage. 4. Must know about capital markets and how they function. 5. Must be a good communicator. 6. Must have strong writing skills since all financial analysis needs to be presented in the form of reports and/or case studies.

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Q.99 How do you value a stock?

One of the most common valuation methods used for stock valuation i.e., DCF valuation methods and relative valuation methods using comparable public companies and precedent transactions.

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Q.100 What is a beta?

Beta is a measure of market (systematic) risk. Beta is primarily used in the capital asset pricing model (CAPM) to determine a cost of equity. Beta measures a stock’s volatility of returns relative to an index. Therefore a beta of 1 has the same volatility of returns as the index, and a beta higher than 1 is more volatile.

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Q.101 Why should we unlever beta?

Beta is levered to reflect the debt of each company. But every organization’s capital structure is different and we want to look at how “risky” a company is regardless of the percentage of debt or equity it has. Now in order to get that, it is required to unlever beta each time. Therefore we look up the beta for a group of comparable companies, and unlever each one. Then take the median of the set, and then lever it based on the company’s capital structure. Then we use this Levered Beta in the Cost of Equity calculation. The formulas for unlevering and re-levering Beta is - Unlevered Beta = Levered Beta / (1 + ((1 – Tax Rate) x (Total Debt/Equity))) Levered Beta = Unlevered Beta x (1 + ((1 – Tax Rate) x (Total Debt/Equity)))

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Q.102 Give the difference between an associate and an analyst in Investment Banking?

The analyst role is considered to be the lowest level in the organizational chart, in Investment Banking,. Such that the analyst generally reports to an associate, and therefore the associate profile in Investment Banking ranks higher than the analyst.

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Q.103 Brief about Investment Analyst Reports of Equity Research?

The investment analyst reports provides advice whether to buy or sell the securities of specific companies or industries. Investment Analyst report are produced by research analysts employed by firms with interest in selling securities; but they can offer a useful model in understanding how investment professionals analyse an industry and what data points they find of interest.

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Q.104 Describe the equity research structure?

Equity Research organizational chart are extremely flat with only 3 levels - Associate, Analyst and the Head of Equity Research. Such that each analyst is responsible for covering companies in a particular sector. In real-time there are many more sectors and sub-sectors as an investment bank can have anywhere from 10 analysts to as many as 60 analysts. A single analyst typically has one or two associates based on the number of companies it covers.

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Q.105 What are the skills required to become an Equity Research Analyst?

Some of the most crucial skills needed are - 1. Must possess higher analytical abilities. 2. Must have strong understanding of accounts and financial fundamentals. 3. Must have knowledge about global and local business is an added advantage. 4. Must know about capital markets and how they function. 5. Must be a good communicator. 6. Must have strong writing skills since all financial analysis needs to be presented in the form of reports and/or case studies.

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Q.106 How do you value a stock?

One of the most common valuation methods used for stock valuation i.e., DCF valuation methods and relative valuation methods using comparable public companies and precedent transactions.

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Q.107 What is a beta?

Beta is a measure of market (systematic) risk. Beta is primarily used in the capital asset pricing model (CAPM) to determine a cost of equity. Beta measures a stock’s volatility of returns relative to an index. Therefore a beta of 1 has the same volatility of returns as the index, and a beta higher than 1 is more volatile.

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Q.108 Why should we unlever beta?

Beta is levered to reflect the debt of each company. But every organization’s capital structure is different and we want to look at how “risky” a company is regardless of the percentage of debt or equity it has. Now in order to get that, it is required to unlever beta each time. Therefore we look up the beta for a group of comparable companies, and unlever each one. Then take the median of the set, and then lever it based on the company’s capital structure. Then we use this Levered Beta in the Cost of Equity calculation. The formulas for unlevering and re-levering Beta is - Unlevered Beta = Levered Beta / (1 + ((1 – Tax Rate) x (Total Debt/Equity))) Levered Beta = Unlevered Beta x (1 + ((1 – Tax Rate) x (Total Debt/Equity)))

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