Value investing is predicated on finding companies that are underpriced given their fundamental value (FV). In a dividend discount model, the FV of a firm is equivalent to the sum of its future dividends. So, if a firm is trading below its FV with a margin of safety, it's worth investing.

**Ways of assessing FV:**

```
ROE_old = Old return on equity
ROE_new = New return on equity
k = Cost of capital
```

**Net asset value**(balance sheet). Assuming`ROE_old = ROE_new = k`

, the only value is in the firm's assets. So, you should push to have the firm liquidated.**Earnings power value**(income statement). When`ROE_new = k`

, you assume that the company won't create any new offerings.**Growth value**(value from future NPV positive projects). If`ROE_new > k`

, the FV is equal to the earnings power value and the present value of growth opportunities.

For further derivation: