Chapter 13 - Valuation Of Investments

Question 1

Valuation methods for individual investments

Answer 1

Historic book value
Written up or written down book value
Market value
Smoothed market value
Fair value
Discounted cashflow
Stochastic modeling
Arbitrage value

Question 2

Market values vs calculated values

Advantages

Answer 2

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

Question 3

Market values vs calculated values

Disadvantages

Answer 3

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

Question 4

Bond valuations

Answer 4

Discounted value of continuent cashflows

Discount rate adjusted for riskiest and marketability

Question 5

Equity valuations

Answer 5

Starting point is market value
Discounted dividend model

NAV per share
EVA
Measurable key factors

Question 6

Equity valuations

Definitions and assumptions disco8nted dividend model

Answer 6

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

Question 7

Property valuations

Answer 7

Discounted cashflow

Discount rate depends on riskiness based on yield on bond plus margin

Question 8

Valuation of derivatives

Answer 8

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

Question 9

Allowing for the variability of asset prices

Answer 9

Correctly reflect underlying asset

Comparing assets and liabilities using stable interest rates misleading