explained methodology 1, addded definitions

mba-main.org

@@ -8,6 +8,10 @@
 - [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/4589926#overview][Udemy MBA course]]
 
 * Table of Contents
+** financial terms, errata, etc
+#+attr_html: :class contents-overview
+- [[./mba/finance_terms.org][Financial Terms]]
+
 ** Section 1 - Launching a new company
 #+attr_html: :class contents-overview
 - [[./mba/ch05.org][Chapter 05. How to Legally Protect Your Company]]

mba/ch59.org

@@ -47,9 +47,73 @@
 - do all of them and take an average
 - keep it simple
 
-**** methodology 1:  price / earnings ratio
-- target price should be based on estimates 5 years from now
-  - more or less relevant
-  - don't be a victim of group think
-- estimate what is the percentage of growth in 5 years
-- multiply the EPS (Earnings per share) by that number
+**** methodology 1: price vs earnings per share
+
+***** NOTE: we are calculating STOCK PRICE based on EARNINGS PER SHARE multiplied by YOY GROWTH RATE
+
+***** Understanding "Valuation" - Price/Earnings (P/E) Ratio Methodology
+
+This section of your financial course explains how to estimate the target price of a stock five years into the future using the Price-to-Earnings (P/E) ratio.
+
+***** 1. The Price-to-Earnings (P/E) Ratio
+- The **P/E ratio** is a way to value a stock based on its **earnings per share (EPS)**.
+- It is defined as:
+
+  #+BEGIN_SRC
+  P/E = Stock Price / Earnings Per Share (EPS)
+  #+END_SRC
+
+- Stocks typically trade at a P/E ratio that is close to their **earnings growth rate**:
+  - If a company's **earnings grow at 20% per year**, it will likely have a **P/E ratio of ~20x**.
+  - If earnings **grow at 8% per year**, the stock might trade at **8x EPS**.
+
+***** 2. Forecasting the Target Price (5-Year Estimate)
+- The **target price** in **5 years** is based on the company’s **forecasted EPS** multiplied by a reasonable P/E ratio.
+- In this example:
+  - **MSFT’s EPS is growing at 12% per year**.
+  - The stock should trade at a **P/E of 12x** in 5 years.
+
+***** 3. Using the Provided Table (EPS Forecasts)
+
+| Metric                         | FY19e  | FY20e  |
+|---------------------------------|--------|--------|
+| Diluted Earnings Per Share (EPS) | $3.93  | $4.90  |
+| Year-over-Year EPS Growth       | 12%    | -      |
+
+- **FY19e EPS = $3.93**
+- **FY20e EPS = $4.90**
+- **EPS is growing at 12% per year**.
+
+***** 4. Calculating the Target Price
+- Since the company is growing at **12% per year**, we assume it will trade at **12x earnings** in 5 years.
+- Using the **FY20e EPS of $4.90**:
+
+  #+BEGIN_SRC
+  Target Price = 12 × 4.90 = 59
+  #+END_SRC
+
+***** 5. Comparing Today’s Price to the Target Price
+- **Assume MSFT is trading at $47 today** (when the course was written).
+- **Expected appreciation in 5 years**:
+
+  #+BEGIN_SRC
+  (59 - 47) / 47 = 25% increase
+  #+END_SRC
+
+- Since **MSFT is a mature company**, a **25% increase in 5 years seems reasonable**.
+
+***** Final Takeaways
+✔ The P/E ratio method values stocks based on **earnings growth**.
+✔ Stocks usually trade at a **P/E close to their earnings growth rate**.
+✔ Target price is found by **multiplying the estimated EPS by the assumed P/E ratio**.
+✔ **MSFT, trading at $47 today, could reach $59 in 5 years with 12% EPS growth.**
+
+🚀 Now you understand how the course uses P/E ratios for stock valuation!
+
+
+
+**** methodology 2: price vs revenue/sales
+- assume the avg software company trades at 5x revenue in 5 years
+- MSFT, being a big company that grows slowly, grows at 70% of avg
+  - so instead of trading 5x in 5 years, it will trade at 3x in 5 years
+- therefore the [[file:finance_terms.org::*Market Capitalization (Market Cap)][market cap]] should be $504bn in 5 years

mba/finance_terms.org

@@ -0,0 +1,39 @@
+#+title: Definitions
+
+#+HTML_HEAD: <link rel="stylesheet" type="text/css" href="../_share/media/css/org-media-sass/categories/business.css" />
+#+OPTIONS: H:6
+
+* Links
+- [[./../mba-main.org][TOC | Business]]
+
+* Notes
+
+** Market Capitalization (Market Cap)
+
+Market capitalization (market cap) refers to the total value of a company's outstanding shares of stock. It is used as a measure of a company’s size and worth in the stock market.
+
+*** Formula:
+#+BEGIN_SRC
+Market Cap = Stock Price × Total Outstanding Shares
+#+END_SRC
+
+*** Example:
+If a company has 10 million shares and each share is worth $50, the market cap would be:
+
+#+BEGIN_SRC
+10,000,000 × 50 = 500,000,000
+#+END_SRC
+
+So, the company's market cap is **$500 million**.
+
+*** Market Cap Categories:
+- *Small-cap:* Less than **$2 billion** (e.g., early-stage or high-growth companies)
+- *Mid-cap:* Between **$2 billion - $10 billion** (e.g., growing businesses)
+- *Large-cap:* Over **$10 billion** (e.g., well-established companies like Apple, Microsoft)
+
+*** Why is Market Cap Important?
+- **Indicates company size** – Larger companies tend to be more stable, while smaller ones might have higher growth potential.
+- **Affects investment decisions** – Large-cap stocks are often safer but may grow slower, while small-cap stocks can be more volatile but have higher growth potential.
+- **Used in stock indices** – Major indices like the **S&P 500** are weighted by market cap.
+
+This structured format is now **ready for Org-mode** and easy to read or export! 🚀