7: Financial Management, Financial Valuation

Question 1

what is financial valuation

Answer 1

the process of estimating the fair value of an asset, liability, equity, or a business enterprise.

Question 2

what are the valuation approaches?

Answer 2

market approach: most likely provide best evidence of FV, using prices generated by market transactions
income approach: converting future amounts to current amounts
cost approach

Question 3

what is CAPM

Answer 3

capital asset pricing model: an economic model that determines a measure of relationship between risk and expected return. considers time value of money.

Question 4

what is the CAPM basic formula

Answer 4

Required rate =Risk-free rate + Beta(Expected rate - Risk-free rate)

Question 5

what is beta

Answer 5

measure of systematic risk as reflected by the volatility of an investment or other asset.

Question 6

what are CAPM assumption and limitations

Answer 6

there is an asset class and benchmark for the asset being valued, all investors have equal access to all investments of the class being valued and all use a one period horizon, uses historical data,

Question 7

what is an option

Answer 7

option is a contract that entities owner to buy or sell an asset at a stated price within a specified period

Question 8

option value is determined by 6 factors

Answer 8

1. current stock price relative to option price, greater the stock price over the option price=greater the value of the option
2. time to expiration. longer the time=greater the value
3. risk free rate of return. higher the risk free rate=greater the value
4. measure of risk of optioned asset. larger standard deviation= greater the value
5. exercise price of option
6. dividend payments on optioned security, smaller the dividends=greater the value

Question 9

black scholes option pricing model

Answer 9

developed to value options under specific circumstances. this pricing model uses 6 factors plus use of probabilities and discounting of the exercise price

Question 10

In a common-size balance sheet

Answer 10

In a common-size balance sheet, each item is measured as a percentage of total assets
Such percentages are useful in comparing financial statements between entities and over time for the same entity.

Question 11

In a common-size income statement

Answer 11

In a common-size income statement, each item is measures as a percentage of total revenues.

Question 12

the price/earnings (P/E) ratio

Answer 12

computed as the market price of the stock divided by the earnings per share (EPS). Note that both values are on a per share basis and the resulting calculation shows the relationship between the price of a share of stock in the market and the earnings for each share of stock.

Question 13

what are the business valuation approaches

Answer 13

market approach: determines value of business by comparing it with highly similar entities
income approach: determines value by calculating net present value of the benefit stream generated by the entity being valued
asset approach: determines value by adding values of individual assets that comprise the entity being valued. appropriate for valuing entity in liquidation.