Ch 2, Module 7 Flashcards
Define an option
a contract that entitles the owner to buy (call option) OR sell (put option) a stock/asset at a given price within a stated period of time
What increases the value of a CALL option
higher the price of stock = higher the option value
Higher the risk free rate/discount rate = higher option value
Higher/longer the time of until expiration = higher option value (because more time for that option to be in the money)
Higher volatility/measure of risk = higher option value
LOWER the strike/exercise price = higher option value
What is the european style of call options
only excerisable at MATURITY
What is the Black Scholes model
a model that values options
What is a binomial model
aka Cox-Ros-Rubinstein model
a variation of the orginal black-scholes model
considers the underlying security over a priodof time, as compared to the value at one point in time like the black scholes
useful for american style options or stocks that pay dividends
Describe american style options
you don’t have to wait until maturity to exercise
can be exercised at any point of time up until maturity
How does one measure the value of debt
equal to the present value of its future cash flows (which consist of interest payments and the principal payment at maturity)
What are the ways to value tangible assets (PPE)
stay CALM
- Cost method
- Appraisal
- Liquidation Value
- Market Value Method
Cost Method
= NBV
value of assets is based on the original cost paid to acquire the asset.
Adjustments may be made for depreciation in order to reduce the value of the asset to reflect utility.
Defin Market Value Method
require that similar assets be available in the marketplace in order to find a comparable value
typically either replacement cost (what it would cost to replace the valued asset) and net realizable value (price at which the asset could be sold in the marketplace, reduced by any costs associated with selling the asset)
Define the appraisal method
professional appraiser determines the value of the asset assuming that the company can find an appraiser with knowledge and experience
Define liquidation value
IF the asset had to be sold TODAY, the liquidation value represents the amount that the company would get upon sale assuming that there is an active market for the asset.
How to value intangible assets
just ask MIC
Market Approach
Income Approach
Cost Approach
Define the market approach
this approach requires that acutal arm’s length transactions (sales, transfers, licenses) in similar market be used as a reference for the asset to be valued.
the preferred method for valuing intangibles but hard to achieve due to the unique nature of intangibles and infrequency of trading
Define income approach
future expected cash flows over the estimated useful lie of the intangible asset are discounted to PV using discount rates refelcting the level of risk associated with the income stream.
2nd best option for valuing intangibles
