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- A Company can be defined as an association of many persons who contribute money or monies worth to a common stock and employed in some trade or business and who share the profit and loss arising therefrom. In this chapter a detail note has been given regarding characteristics of the company, how to prepare segment report, important ratios used in analyzing a company's performance, and how to estimate capitalization rate for the company.
- The estimation of capitalization rate for the equity stock of a company must take into consideration the business risk and financial risk (of which default risk is a part) besides the interest rate, purchasing power, and market risks borne by the shareholders. Business risk arises out of the fluctuations in the earnings of a company - the wider the fluctuations, the greater is the business risk. Financial risk stems from the use of leverage - the use of external debt relative to net worth. Other things being equal, the higher the debt to net worth ratio, the greater is the financial risk.
- A growth stock is one that is supposed to earn above normal returns some point of time in future. This has two implications: (i) undervalued stocks can be growth stocks irrespective of the nature of the company; (ii) overvalued stocks of growth companies could be speculative stocks as they may have a high probability of below-normal returns. In this section, some models are presented which would help in classifying a stock as a growth stock or a speculative stock or a correctly valued stock.