B2 - M7: Financial Valuation Methods II

Question 1

What is an options contract

Answer 1

• allows owner to buy or sell a stock or asset at a given price with a period of time
• buy = call option
• sell = put option

Question 2

How is the black scholes model used by accountants?

Answer 2

to value stock options

Question 3

black sholes model inputs

Answer 3

• current price (higher rate –> higher option value)
• exercise price
• risk free interest rate (higher rate –> higher option value)
• current time until expiration (longer time –> higher option value)
• risk for underlying stock (higher risk –> higher option value)

Question 4

black sholes model assumptions

Answer 4

• stock prices vary
• risk free rate + volatitilty are constant over option life
• no taxes
• no dividends
• european style options (exercise at maturity)

Question 5

black scholes model limiations

Answer 5

• real world results may vary
• assume instant trading
• underestimates extremem price movements
• not applicable to american options

Question 6

Cox-Ross-Rubinstein Model or Binomial Model

Answer 6

• black scholes model alternative

- considers underlying security over a period of time

Question 7

Bionomial Model Assumptions

Answer 7

• perfectly efficient market

- stock will go up and down

Question 8

Bionomial Model benefits

Answer 8

• can be used with american options

- includes dividends

Question 9

what is a bond’s value

Answer 9

PV of future CF

Question 10

4 methods to value tangible assets

Answer 10

1) cost - cost to acquire
2) market value - replacement cost or NRV can be used, doesnt have to be the lowest
3) appraisal - professional determines value
4) liquidation - amount a company would receive if sold on active market today (bankruptcy)

Question 11

3 methods to value intangible assets

Answer 11

1) market - same as with tangible asset sbut since nature is different it could be challenging. Could look at similar patents that’ve sold
2) income - estimate future CF over estimated useful life and discount to PV (discount factor * expected income)
3) cost - replacement or reproduction cost can be used. includes materials, OH, labor, legal, development, production, and opportunity

Question 12

Examples of accounts that will require estimates and info considered when making estimates

Answer 12

• AR w/ uncollectible accounts
• Inventory/ lower of cost/market or cost/NRV including write down
• FA and accu. dep
• contingent liabilities and estimate of probable future loss

consider when making estimates

• historical data
• market info
• expected usage
• estimates from experts