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Equity Asset Valuation > Ch. 1 Equity Valuation > Flashcards

Ch. 1 Equity Valuation Flashcards

1
Q

Intrinsic value

A

Value of asset given a hypothetically complete understanding

Of assets investment characteristics

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2
Q

Going concern assumption

A

Assumption company will continue its business activities into the foreseeable future

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3
Q

Fundamentals

A

Characteristics of a company related to profitability, financial strength or risk

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4
Q

Divestiture

A

Company sells some major component of its business

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5
Q

Spin off

A

Company separates one component of its business and transfers ownership of separate business to its shareholders

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6
Q

Leveraged buyout

A

Acquisition involving significant debt, which is collateralized by assets of company being acquired

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7
Q

5 steps in valuation process

A 
1 understanding the business
2 forecasting company performance 
3 selecting appropriate valuation method
4 converting forecasts to valuation
5 applying valuation conclusions
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8
Q

Industry and competitive analysis, together with an analysis of financial statements and other company disclosures provides a basis for…

A

Forecasting company performance

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9
Q

Forecasts of sales, earnings, dividends and financial position (pro forma analysis) provide the…

A

Inputs for most valuation models

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10
Q

Estimating value involves…

A

Judgement

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11
Q

Sensitivity analysis

A

Analysis to determine how changes in an assumed input would affect outcome of an analysis

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12
Q

Porter’s 5 forces characterizing industry structure

A 
1 intro industry rivalry
2 new entrants
3 substitutes
4 supplier power
5 buyer power
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13
Q

Intraindustry rivalry, what enhances profitability?

A

Lower rivalry

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14
Q

New entrants, what equates to profitability?

A

Barriers to entry and less entrants

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15
Q

Substitutes, when few potential substitutes exist or cost to switch to substitute is high, industry participants are…

A

Less constrained in raising prices, generating higher profits

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16
Q

When many suppliers needed by industry exist, suppliers have…

A

Limited power to raise prices

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17
Q

When many customers for an industries product exist, customers have…

A

Limited power to negotiate lower prices

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18
Q

The level and trend of a company’s market share, indicate its…

A

Relative competitive position within an industry

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19
Q

Porter’s 3 corporate strategies for achieving above average performance

A

1 cost leadership
2 differentiation
3 focus

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20
Q

Cost leadership 2

A

Being the lower oust producer while offering products comparable to those of other companies

So products can be priced at or near industry average

21
Q

Differentiation

A

Offering unique products or services that are widely valued by buyers, commanding premium prices

22
Q

Focus

A

Seeking a competitive advantage within a target segment(s) of industry based on cost leadership or differentiation

23
Q

Business model refers to…

A

How a company makes money

24
Q

Business model 3

A

1 which customers it targets
2 products or services sold to those customers
3 how it delivers those products and services

25
Q

Looking at historical annual reports shows how…

A

Management has foreseen challenges and adapted to those challenges

26
Q

Qualitative factors of company’s financial and operational strategic execution 4

A

1 company’s ownership structure
2 company’s intellectual and physical property
3 terms of company’s intangible assets
4 contingent liabilities

27
Q

An important way to assess quality of earnings is to decompose net income into…

A

Cash component, operating cashflows + investing cash flows

28
Q

Important for accruals to…

A

See larger percentage of operating cashflows

29
Q

Quality of earnings: recognizing revenue early 2

A

1 Bill and hold sales

2 recording sales of equipment or software prior to installation and acceptance by customer

30
Q

Quality of earnings: recognition of revenue early

Interpretation

A

Acceleration in recognition of revenue boosts reported income masking decline in operating performance

31
Q

Quality of earnings: classification of nonoperating income or gains as part of operations

Interpretation

A

Nonrecurring income or gains does not relate to true operating performance

Possibly masking declines in operating performance

32
Q

Quality of earnings: recognizing too much or too little reserves in current year 3

A

1 restructuring reserves
2 loan-loss or bad debt reserves
3 valuation allowances against deferred tax assets

33
Q

Quality of earnings: recognizing too much or too little reserves in current year

Interpretation

A

May boost current income at expense of future income or lower earnings at benefit of future earnings

34
Q

Quality of earnings: deferral of expenses by capitalizing expenditures as an asset 2

A

1 customer acquisition costs

2 product development costs

35
Q

Quality of earnings: deferral of expenses by capitalizing expenditures as an asset

Interpretation 2

A

1 may boost current income at expense of future income

2 May mask problems with underlying business performance

36
Q

Quality of earnings: use of aggressive estimates and assumptions 6

A

1 asset impairments
2 long depreciable lives
3 long periods of amortization
4 high assumed discount rate for pension liabilities
5 low assumed rate of compensation growth for pension liabilities
6 high expected return on assets for pension

37
Q

Quality of earnings: Use of aggressive estimates and assumptions

Interpretation

A

Aggressive estimates may indicate actions taken to boost current reported income

Changes in assumptions may indicate attempt to mask problems with underlying performance in current period

38
Q

Quality of earnings: off balance sheet financing 2

A

1 leasing assets

2 securitizing receivables

39
Q

Quality of earnings: characterization of an increase in bank overdraft as operating cash flow

Interpretation

A

Operating cash flow may be artificially inflated

40
Q

2 perspectives for forecasting company performance

A

1 economic environment in which the company operates

2 company’s operating and financial characteristics

41
Q

Absolute valuation model

A

Specifies asset’s intrinsic value

42
Q

In finance theory, present value models are considered…

A

Fundamental approach to equity valuation

43
Q

Relative valuation model

A

Estimates assets value relative to another asset

44
Q

Sum of parts valuation AKA breakup value AKA private market value

A

Valuation that sums estimated values of each of companies businesses as if they were a separate going concern

45
Q

Conglomerate discount

A

Market applies discount to stock of company operating multiple unrelated businesses compared to stock of companies with narrower focus

46
Q

2 important aspects of converting forecasts to valuation are

A

1 sensitivity analysis

2 situational adjustments

47
Q

Inventory in valuation

A

Inventory will be sold at a higher price if company is operating

Inventory will be sold at a lower price if the company is liquidated

48
Q

Comparing PEs is an example of…

A

Relative valuation model

Equity Asset Valuation (1 decks)

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