1. Formulate an estimable model grounded on an established theory or principle in finance. Be able to present the model mathematically and explain the variables to be analyzed.

For example,

Problem:

What are the factors affecting the valuation of a common stock?

Theoretical Framework:

The P/BV ratio or the price-to-book value ratio is computed by dividing the market price per share by the current book value of equity per share.

Estimable Model:

PBV=+1ROE+2Payout+ 3Beta+4EGR+

where,

P/BV = actual price-to-book value ratio

ROE = return on equity

Payout = dividend payout ratio

Beta = risk level of the stock

EGR= expected growth rate over the next five years