A home can be financed many ways. But the value of the home is independent of the financing regardless of how the asset is financed. One thing that is always true. Is that the market value of the total financing that is the market value of the equity and the debt will always equal the total asset value. This principle applies when valuing all assets and even businesses which are essentially collections of assets while companies are funded with various and differing levels of debt and equity. We can arrive at the value of the entire enterprise by adding the total value of debt net of any cash on hand. This is referred to as net debt and the market value of the equity. For republic company the traded share price in the public markets multiplied by the number of outstanding shares is the market value of the equity. This is known as the market capitalization or the market cap. A company's enterprise value can be thought of as the value of its net operating assets. These are the assets that are employed with generating the earnings of the company value in the market is driven by the anticipated growth of the company the better a company performs the stronger the industry and the better the overall economy, the more the market will value the future growth as the value of the operating assets grow the equity value grows and this is because of course debt will always have a fixed claim in equity will always have the residual claim therefore the value of the equity is driven not only by performance industry and economy, but also by the financing as the asset grows the fixed claim remains and the shareholder keeps the rest. There are two approaches to valuing an enterprise, an intrinsic valuation, which examines the future cash flows generated by the net operating assets and values them as of today. This as is implied depends greatly on the addition and calculation of the cash flows. A second approach is a relative valuation which involves looking at the value of a company relative to how a peer group of similar companies are currently being valued in the market. How do the multiples work there are three components a value value driver and a multiple the value must be consistent with the value driver a value driver is usually a profit number associated with the element being valued for example enterprise value as we discussed is the value of the net operating assets ebit is the earnings metric that reflects the earnings from the operating assets EV the ebit gives us a multiple that tells us how much investors will pay for one dollar of ebit moving down the statement of earnings or income statement. We can see the relationship between value and value drivers until ultimately we arrive at net income the residual income which is the value driver for the equity holders expressed per share as equity typically is. The value of equity over the net earnings per share gives us the PE multiple. Again, this is what investors are willing to pay for one dollar of earnings.

Some of the most common multiples are EV to ebitda for valuing enterprise value and price earnings for valuing equity. The key driver of the multiples is expected future profit growth enterprise or equity value includes the worth of all future growth while the earnings simply reflect the current earnings of the company. The more the company is expected to grow in the future the higher the enterprise or equity value compared to the current earnings this translates into a higher multiple. The increase in the price of the share of the investment when combined with cash paid from the company to the shareholders, otherwise known as dividends create the total return of the investment in the short-term return value will be driven more by market valuation. However, in the long term, the main driver evaluation is fundamental performance, which is illustrated by the growth of dividends. What makes the price go up if price is equal to the multiple times the earnings the two ways for a stock price to rise are one multiple expansion factors driving up the perceived value and two earnings improvement which with or without multiple expansion will lead to higher prices. Both components of price are impacted by economic growth. Beta is referred to how sensitive and asset is to underlying markets a stock beta of one implies that the market is perfectly correlated to overall Market risk higher betas imply greater risk than the market and lower beta's imply lower risk than the market. In general cyclical stocks in these industries have betas of greater than one. They are more sensitive to the overall economy in Market a cyclical stock is highly correlated to economic activity when the economy is in a recession the profits of a cyclical company tend to drop and so does its share price conversely when the economy is in good shape otherwise known as expansion the share price tends to go up with the profit growth. The best example is the automobile sector most likely an individual is not willing to buy a new car when income is lower. This will drag car manufacturer's revenues down on the contrary. The individual will be more tempted to treat himself or herself to a new car if one's economic situation is improving. A defensive or non-cyclical stock is a stock whose profit growth and therefore price have a very low correlation to the economic activity. No matter how the economy is doing the revenues the earnings and the cash flows of the company remain relatively stable. And so does the share price some of these industries ebb and flow with the overall economy, but not severely so example of this would be an individual looking to buy toothpaste is most likely not going to not buy toothpaste simply because the economic forecast does not good sensitive Industries fall between the defensive and cyclical Industries as they are not immune to a poor economy, but they also may not be as severely impacted by a poor economy as Industries in the cyclical sector in general stocks in these industries have betas that are close to one.