1. Let's start by stating the problem: Fundamental analysis involves evaluating a company's financial statements, market position, and economic factors to estimate its intrinsic value. 2. The key formula often used in fundamental analysis for stock valuation is the Discounted Cash Flow (DCF) model: $$\text{Intrinsic Value} = \sum_{t=1}^n \frac{CF_t}{(1+r)^t}$$ where $CF_t$ is the cash flow at time $t$, $r$ is the discount rate, and $n$ is the number of periods. 3. Important rules: - Cash flows must be estimated accurately. - The discount rate reflects the risk and opportunity cost. - The sum of discounted cash flows gives the present value. 4. Intermediate work example: Suppose a company is expected to generate cash flows of 100, 110, and 120 over the next three years, and the discount rate is 10%. Calculate each discounted cash flow: $$\frac{100}{(1+0.10)^1} = 90.91$$ $$\frac{110}{(1+0.10)^2} = 90.91$$ $$\frac{120}{(1+0.10)^3} = 90.16$$ 5. Sum these to find intrinsic value: $$90.91 + 90.91 + 90.16 = 271.98$$ 6. This means the intrinsic value of the company based on these cash flows and discount rate is approximately 271.98. 7. In plain language, fundamental analysis helps investors decide if a stock is undervalued or overvalued by comparing this intrinsic value to the current market price. This concludes the explanation of fundamental analysis using the DCF model.