CFA Level 2 Flashcards - 3
Relative valuation models
A model that specifies an asset’s value relative to the value of another asset.
Sell-side analysts
Analysts who work at brokerages.
Sum-of-the-parts valuation
A valuation that sums the estimated values of each of a company’s businesses as if each business were an independent going concern.
Valuation
The process of determining the value of an asset or service either on the basis of variables perceived to be related to future investment returns or on the basis of comparisons with closely similar assets.
Book value per share
The amount of book value (also called carrying value) of common equity per share of common stock, calculated by dividing the book value of shareholders’ equity by the number of shares of common stock outstanding.
Capitalization rate
The divisor in the expression for the value of perpetuity. In the context of real estate, it is the divisor in the direct capitalization method of estimating value. The cap rate equals net operating income divided by value.
Continuing value
The analyst’s estimate of a stock’s value at a particular point in the future.
Discount
To reduce the value of a future payment in allowance for how far away it is in time; to calculate the present value of some future amount. Also, the amount by which an instrument is priced below its face value.
Fixed-rate perpetual preferred stock
Nonconvertible, noncallable preferred stock that has a fixed dividend rate and no maturity date.
Forward dividend yield
A dividend yield based on the anticipated dividend during the next 12 months.
Free cash flow to equity
The cash flow available to a company’s common shareholders after all operating expenses, interest, and principal payments have been made and necessary investments in working and fixed capital have been made.
Free cash flow to the firm
The cash flow available to the company’s suppliers of capital after all operating expenses (including taxes) have been paid and necessary investments in working and fixed capital have been made.
Gross domestic product
The market value of all final goods and services produced within the economy during a given period (output definition) or, equivalently, the aggregate income earned by all households, all companies, and the government within the economy during a given period (income definition).
Justified (fundamental) P/E
The price-to-earnings ratio that is fair, warranted, or justified on the basis of forecasted fundamentals.
Mature growth rate
The earnings growth rate in a company’s mature phase; an earnings growth rate that can be sustained long term.
No-growth company
A company without positive expected net present value projects.
No-growth value per share
The value per share of a no-growth company, equal to the expected level amount of earnings divided by the stock’s required rate of return.
Opportunity cost
Reflects the foregone opportunity of investing in a different asset. It is typically denoted by the risk-free rate of interest, r.
Perpetuity
A perpetual annuity, or a set of never-ending level sequential cash flows, with the first cash flow occurring one period from now.
Present value of growth opportunities
The difference between the actual value per share and the no-growth value per share. Also called value of growth.
Real options
Options that relate to investment decisions such as the option to time the start of a project, the option to adjust its scale, or the option to abandon a project that has begun.
Residual income
Earnings for a given period, minus a deduction for common shareholders’ opportunity cost in generating the earnings. Also called
economic profit or abnormal earnings.
Supernormal growth
Above-average or abnormally high growth rate in earnings per share.
Sustainable growth rate
The rate of dividend (and earnings) growth that can be sustained over time for a given level of return on equity, keeping the capital structure constant and without issuing additional common stock.