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Equity > Asset/Equity Valuation and Analysis > Flashcards

Asset/Equity Valuation and Analysis Flashcards

0
Q

Why can market prices be different than actual intrinsic value

A

Market is not perfectly informationally efficient

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1
Q

What is intrinsic value of stock

A

Estimate of an assets value incorporating knowledge of asset characteristics and issuer

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2
Q

Calc diff between analyst value and price

A

IVanalyst - price = (IVactual - price) + (IVanalyst - IVactual)

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3
Q

What is going concern assumption

A

Company will continue to operate as a business (not go out of business)

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4
Q

What is liquidation value

A

Estimate of value of individual assets less liabilities if sold separately

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5
Q

What is equity valuation

A

Estimating value via

1) using model based on variables determining fundamental value or
2) comparing to observable market value of similar assets

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6
Q

What are porters five forces

A
  1. Rivalry among existing competitors
  2. Threat of new entrants
  3. Threat of substitutes
  4. Bargaining power of buyers
  5. Bargaining power of suppliers
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7
Q

What are 5 quality of earnings issues

A
  1. Accelerating/premature recognition of income
  2. Reclassifying gains & non-op income
  3. Expense recognition and losses
  4. Amortization, dep, discount rates
  5. Off-balance sheet issues
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8
Q

What’s diff between absolute and relative valuation model

A

Absolute - value estimate from future earnings, CF, risk (DDM, FCF)

Relative - compare to market prices of similar securities (P/E, P/CF, P/S)

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9
Q

Two central questions form base for firm’s choice of competitive strategy

A

What is long term attractiveness of industry

Competitive advantage relative to industry

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10
Q

Explain entry barriers (threat of new entrants)

A
  • economies of scale
  • product differentials
  • brand identity
  • capital requirements
  • access to distribution channels
  • gov’t policy
  • cost advantages
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11
Q

Explain Threat of substitutes

A
  • relative price performance of substitutes
  • buyer propensity to substitute
  • switching costs
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12
Q

Explain bargaining power of buyers

A

Bargaining leverage

Price sensitivity

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13
Q

Bargaining power of suppliers

A 
Differentiating inputs 
Presence of substitute inputs 
Supplier concentration 
Importance of volume to supplier
Threat of forward integration
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14
Q

Rivalry among existing competitors

A 
Industry growth 
Fixed costs 
Value added 
Product differences 
Brand identity
Diversity of competitors
Exit barriers
Informational complexity
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15
Q

Industry analysis report should address these 5 factors

A 
Industry classification 
External factor review 
Demand analysis 
Supply analysis
Profitability analysis
16
Q

What is included in industry classification

A

Product life cycle (pioneer, growth, maturity, decline)

Business cycle reaction (growth, defensive, cyclical)

17
Q

What is included in external factor review

A 
Technology (mature? New?)
Government (stable?)
Social changes (lifestyle?)
Demography (pop age)
Foreign influences (new competitors/markets?)
18
Q

What is included in demand analysis

A

Assess future demand

Relationship between GDP growth and industry revenue

19
Q

What is included in supply analysis

A

Aggregate size of potential supply of output for all industry participants
Compare to projected demand for output

20
Q

What is included in profitability analysis

A

Porters five forces - use ratings neutral, positive, negative

21
Q

What is difficulty with forecasting cash flows in emerging markets?

A

High levels of inflation

  • BS inventory, plant, prop, equip well below current cost
  • IS dep charges well below current replacement cost
22
Q

How will nominal ratios be affected due to high inflation

A 
Overstated sales growth 
Overstated fixed asset turnover 
Overstated operating margins 
Overstated return on invested capital 
Overstated solvency ratios (debt to assets)
23
Q

How to value emerging markets company on real and nominal basis

A
  1. Forecast real EBITDA and FCInv
  2. Forecast nominal dep, NOPLAT, FCInv, WCInv
  3. Forecast real NOPLAT
  4. Forecast nominal and real FCF
  5. Estimate firm value using FCF model; discount real/nominal CF at real/nominal WACC
24
Q

Two ways to incorporate emerging market risk in valuation process

A
  1. Adjust cash flows in probability weighted scenario analysis, use cost of capital for emerging market companies
  2. Adjust cost of capital by adding ad-hoc country risk premium to WACC; discount unadjusted CFs

Equity (7 decks)

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