Chapter 1 - Advanced Valuation Flashcards
What is the bigger fool theory
Suggests that there is no need to determine the value of an asset when there is a bigger fool who is willing to pay a higher price for it
How is technical analysis used to make buy and sell decisions
Analysis of price trends and demand and supply trends to determine when to buy or sell a security
What is the need for valuation
- For investors to pay fair prices for assets
2. For investors to take advantage of mispricing in the market
What are the two categories of valuation
- Fundamental (absolute/intrinsic)
2. Relative
What are some of the ways an active portfolio manager uses valuation
- determine asset allocation (different classes of asset)
- determine asset selection (different securities within an asset class)
- to rebalance the portfolio
What is valuation critical for
- active portfolio management (where technical analysis is not used)
- Merger and acquisition
- capital raising
- corporate finance decisons
what key data does valuation use
economic, industry and company
What are some qualitative factors that affect valuation
- quality of management
- transparency and accuracy of firm’s reporting
- corporate governance structures
- corporate culture
What 2 other factors impact valuation from an investor’s perspective
- control premium
2. illiquidity discount
FCFF can be estimated from 4 income statement items
- Net profit
- EBIT
- EBITDA
- cash flow from operating activities
What are non-cash charges
There are amounts charged to the company for utilization of tangible and intangible fixed assets (a charge for cash investments made previously)
List noncash charges
- depreciation
- amortization
- charges (provisions) for restructuring
- noncash loss on sales of fixed asset
Cash from operations is expressed as
Net income + non cash charges - changes in working capital
Why is interest expense added back to net income calculation for FCFF
- This is cash available to the company
- Paying interest reduces the company’s tax bill and this is already reflected in the net profit
- To avoid double counting, the figure to be added back is adjusted for taxes
What are the formulas for FCFF
1. From Net income FCFF = NI +NCC + (1-T)*I -Delta(WC) - CI 2. From operating cash FCFF = OC + (1-T)*I - CI 3. From EBIT FCFF = EBIT(1-T) + NCC - Delta(WC) - CI 4. From EBITDA FCFF = EBITDA(1-T) +D*T - Delta(WC) - CI
