Asset/Equity Valuation and Analysis Flashcards
Why can market prices be different than actual intrinsic value
Market is not perfectly informationally efficient
What is intrinsic value of stock
Estimate of an assets value incorporating knowledge of asset characteristics and issuer
Calc diff between analyst value and price
IVanalyst - price = (IVactual - price) + (IVanalyst - IVactual)
What is going concern assumption
Company will continue to operate as a business (not go out of business)
What is liquidation value
Estimate of value of individual assets less liabilities if sold separately
What is equity valuation
Estimating value via
1) using model based on variables determining fundamental value or
2) comparing to observable market value of similar assets
What are porters five forces
- Rivalry among existing competitors
- Threat of new entrants
- Threat of substitutes
- Bargaining power of buyers
- Bargaining power of suppliers
What are 5 quality of earnings issues
- Accelerating/premature recognition of income
- Reclassifying gains & non-op income
- Expense recognition and losses
- Amortization, dep, discount rates
- Off-balance sheet issues
What’s diff between absolute and relative valuation model
Absolute - value estimate from future earnings, CF, risk (DDM, FCF)
Relative - compare to market prices of similar securities (P/E, P/CF, P/S)
Two central questions form base for firm’s choice of competitive strategy
What is long term attractiveness of industry
Competitive advantage relative to industry
Explain entry barriers (threat of new entrants)
- economies of scale
- product differentials
- brand identity
- capital requirements
- access to distribution channels
- gov’t policy
- cost advantages
Explain Threat of substitutes
- relative price performance of substitutes
- buyer propensity to substitute
- switching costs
Explain bargaining power of buyers
Bargaining leverage
Price sensitivity
Bargaining power of suppliers
Differentiating inputs Presence of substitute inputs Supplier concentration Importance of volume to supplier Threat of forward integration
Rivalry among existing competitors
Industry growth Fixed costs Value added Product differences Brand identity Diversity of competitors Exit barriers Informational complexity
Industry analysis report should address these 5 factors
Industry classification External factor review Demand analysis Supply analysis Profitability analysis
What is included in industry classification
Product life cycle (pioneer, growth, maturity, decline)
Business cycle reaction (growth, defensive, cyclical)
What is included in external factor review
Technology (mature? New?) Government (stable?) Social changes (lifestyle?) Demography (pop age) Foreign influences (new competitors/markets?)
What is included in demand analysis
Assess future demand
Relationship between GDP growth and industry revenue
What is included in supply analysis
Aggregate size of potential supply of output for all industry participants
Compare to projected demand for output
What is included in profitability analysis
Porters five forces - use ratings neutral, positive, negative
What is difficulty with forecasting cash flows in emerging markets?
High levels of inflation
- BS inventory, plant, prop, equip well below current cost
- IS dep charges well below current replacement cost
How will nominal ratios be affected due to high inflation
Overstated sales growth Overstated fixed asset turnover Overstated operating margins Overstated return on invested capital Overstated solvency ratios (debt to assets)
How to value emerging markets company on real and nominal basis
- Forecast real EBITDA and FCInv
- Forecast nominal dep, NOPLAT, FCInv, WCInv
- Forecast real NOPLAT
- Forecast nominal and real FCF
- Estimate firm value using FCF model; discount real/nominal CF at real/nominal WACC
Two ways to incorporate emerging market risk in valuation process
- Adjust cash flows in probability weighted scenario analysis, use cost of capital for emerging market companies
- Adjust cost of capital by adding ad-hoc country risk premium to WACC; discount unadjusted CFs
