Business Valuations (3)

Question 1

What do cash flow basis establish?

Answer 1

The present value of a company either in $m or per share

Question 2

How is dividend valuation method calculated?

Answer 2

The present value of future dividends being generated by curernt management team

Question 3

When is DVM calculated?

Answer 3

Suitable for valuing a minority interest in shares of a company

Question 4

When is DV suitable?

Answer 4

Valuing a minority in shares of a company, as it ingores forecast synergies arising from a takeover

Question 5

What is a disadvantage of simple dividend growth model?

Answer 5

Difficult to estimate future dividend growth

Inaccurate to assume growth is constant

Creates zero values for zero dividend companies

Creates negative values for high growth companies

Question 6

What is DCF method value?

Answer 6

Calculated as present value of future cash flows that are generated by new management team

Question 7

When is DCF useful?

Answer 7

For valuing a controlling interest in the shares of a company, where owners can act to change profitability of a company

Question 8

What is DCF also used for?

Answer 8

Irredeemable debt
Redeemable debt
Convertible debt
Preference shares

Question 9

When we are valuing securities from viewpoints of investors?

Answer 9

Any tax relief due on interest payments is ignored so cash flows and required yield should both be pre-tax

Question 10

What happens for convertible debt and redeemable debt?

Answer 10

DCF should include interest received during term of debt + amounts received at redemption

Question 11

What happens for irredeemable debt and preference shares?

Answer 11

The cash flows can be treated as being received into perpetuity

Question 12

What is the efficient market hypothesis?

Answer 12

A rationale for explaining how share prices react to new information about a company, and when any such change in share price occurs

Question 13

What is allocative efficiency

Answer 13

The ability of a financial market to direct funds to borrowers which can use them profitability

Question 14

What is operational efficiency

Answer 14

Describes the ability of a financial market to operate with minimal transaction costs

Question 15

What is informational efficiency?

Answer 15

Market price for securities reflects all relevant and available info relating to securities and company which issued them

Question 16

What is zero efficency?

Answer 16

Share prices fail to reflect factors that should impact share price

Question 17

What is weak form?

Answer 17

Share prices reflect historical info

Question 18

What is semi-strong firm?

Answer 18

Historical info and all publicly available info quickly and accurately

Question 19

What is strong form?

Answer 19

Share prices reflect all info, publicly available or not

Question 20

Implication of zero efficiency?

Answer 20

Regularly mispriced

Investors can make excess profits by analysing past share price movements

Question 21

Implication of weak form?

Answer 21

Investors can’t make excessive profits over long-term by studying past share price movements

Random walk theory

Investors can make excess profits by reacting quicker tha stock market does

Question 22

What is random walk theory?

Answer 22

Share prices movements are unpredictable

Question 23

Implications of semi-strong form?

Answer 23

Investors can’t beat market in long-term by analysing past price patterns or by analysing past information

Question 24

Implications of strong form?

Answer 24

Share prices respond to new developments and events before they become public knowledge

Question 25

What is the central paradox of efficient markets?

Answer 25

People believe market is inefficient, so they trade securities in an attempt to outperform the market

Question 26

Long-term investors and semi-strong form?

Answer 26

Long-term investors aren’t able to make above average profits by identifying shares that have fundamental value that is materially different from their market value