Chapter 13 - Valuation Of Investments Flashcards
Valuation methods for individual investments
Historic book value Written up or written down book value Market value Smoothed market value Fair value Discounted cashflow Stochastic modeling Arbitrage value
Market values vs calculated values
Advantages
Objective Realistic as relisable value on sale Easy as it does not require calculation Well understood and accepted Used as comparison to other valuation methods to see if an asset is over or under priced
Market values vs calculated values
Disadvantages
May not be readily obtainable
Volatile
May not reflect value of future proceeds
Decision about bid, mid and offer price required
Difficult to ensure consistency with liability valuation
Value reflects position of marginal investor rather than individual
May not be realizable value on sale
Bond valuations
Discounted value of continuent cashflows
Discount rate adjusted for riskiest and marketability
Equity valuations
Starting point is market value
Discounted dividend model
NAV per share
EVA
Measurable key factors
Equity valuations
Definitions and assumptions disco8nted dividend model
D is dividend once a year g is rate of growth if dividend i is rate of return i>g and defined consistently Dividend proceeds reinvested at i Tax and expenses ignored
Property valuations
Discounted cashflow
Discount rate depends on riskiness based on yield on bond plus margin
Valuation of derivatives
Principle of no Arbitrage
Swaps, discounting two component cashflows. Zero for both at start
As market rates changes value will change, one positive, one negative
Allowing for the variability of asset prices
Correctly reflect underlying asset
Comparing assets and liabilities using stable interest rates misleading