Definitions Flashcards
Excess earnings method
A specific way of determining a value indication of a business, business ownership interest, or security determined as the sum of a) the value of the assets derived by capitalizing excess earnings and b) the value of the selected base. Frequently used to value intangible assets.
Fair market value
The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under competition to buy or sell and when both have reasonable knowledge of the relevant facts.
Fairness opinion
An opinion as to whether or not the consideration in a transaction is fair from a financial point of view.
Financial risk
The degree of uncertainty of realizing expected future returns of the business resulting from financial leverage.
Guideline public company method
A method within the market approach whereby market multiples are derived from market prices of stocks of companies that are engaged in the same or similar lines of business and that are actively traded on a free and open market.
Income approach
A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated economic benefits into a present single amount.
Internal rate of return
A discount rate at which the present value of the future cash flows of the investment equals the cost of the investment.
Intrinsic value
The value that an investor considers, on the basis of an evaluation of available facts, to be the true or real value that will become the market value when other investors reach the same conclusion. When the term applies to options, it is different between the exercise price and strike price of an option and the market value of the underlying security.
Invested capital
The sum of equity and debt in a business enterprise. Debt is typically a) all interest bearing debt or b) long term, interest bearing debt. When the term is used, it should be supplemented by a specific definition in the given valuation context.
Invested capital net cash flows
This cash flows available to pay out to equity holders (in the form of dividends) and debt investors (in the form of principal and interest) after funding operations of the business enterprise and making necessary capital investments.
Investment risk
The degree of uncertainty as to the realization of expected returns.
Levered beta
The beta reflecting a capital structure that includes debt.
Liquidation value
The net amount that would be realized if the business is terminated and the assets are sold piecemeal. Liquidation can be either orderly or forced.
Market (market-based) approach
A general way of determining value by comparing the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold.
Market capitalization of equity
The share price of a publicly traded stock multiplied by the number of shares outstanding.
Market capitalization of invested capital
The market capitalization of equity plus the market value of the debt component of invested capital.
Market multiple
The market value of a company’s stock of invested capital divided by a company measure (such as economic benefits, number of customers).
Marketability
The ability to quickly convert property to cash at a minimal cost.
Merger and acquisition method
Method w/in the market approach whereby pricing multiples are derived from transactions of significant interests in companies engaged in the same or similar lines of business.
Multiple
The inverse of the capitalization rate.
Net tangible asset value
The value of the business enterprises tangible assets (excluding excess assets and non operating assets) minus the value of its liabilities.
Orderly liquidation value
Liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received.
Premise of value
An assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation, for example going concern or liquidation.
Net PV versus PV
Net pv is the value as of a specified date of future cash inflows less outflows (including the cost of investment) calc’d at a discount rate
PV is the value as of a specified date of future economic benefits and or proceeds from a sale calc’d using an appropriate discount rate.
Portfolio discount
An amount or percentage deducted from the value of a business enterprise to reflect the fact that it owns dissimilar operations or assets that do not fit well together.
Rate of return
Amount of income or loss and or change in value realized or anticipated on an investment, expressed as a percentage of that investment.
Replacement cost new vs Reproduction cost new
Replacement - Current cost of a similar new property having the nearest equivalent utility to the property.
Reproduction - current cost of an identical new property
Required rate of return
Min rate of return acceptable by investors before they will commit money to an investment at a given level of risk.
Residual value
The value as of the end of the discrete projection period in a discounted future earnings model.
Return on equity
The amount expressed as a percentage earned on a company’s common equity for a given period.
Return on invested capital
The amount expressed as a percentage earned on a company’s total capital for a given period.
Risk-free rate
The rate of return available in the market on an investment free of default risk
Risk premium
Rate of return added to a risk-free rate to reflect risk
Rule of thumb
A math formula developed from the relationship between price and certain variables based on experience, observation, hearsay, or a combination of these, usually industry specific.
Special interest purchasers
Acquirers who believe they can enjoy post-acquisition economies of scale, synergies, or strategic advantages by combining the acquired business interest with their own.
Standard of value
Identification of the type of value being utilized in a specific engagement, for example fmv, fv, investment value etc..
Sustaining capital reinvestment
The periodic capital outlay required to maintain operations at existing levels, net of the tax shield available from such outlays.
Systematic risk
The risk that is common to all risky securities and cannot be eliminated through diversification. The measure of systematic risk in stocks is the beta coefficient.
Unlevered beta
The beta reflecting a capital structure without debt
Unsystematic risk
The risk specific to an individual security that can be avoided through diversification.
Valuation ratio
A fraction in which a value of price serves as the numerator and financial, operating or physical data serve as the denominator.
WACC
The cost of capital (discount rate) determined by the weighted average, at market value, of the cost of all financing sources in the business enterprises capital structure.
Adjusted book value method
A method within the asset approach whereby all assets and liabilities (including off-balance sheet, intangible, and contingent) are adjusted to their fair market values.
Arbitrage pricing theory
A multivariate model for estimating the cost of equity capital, which incorporates several systematic risk factors.
Asset (asset based) approach
A general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of the assets net of liabilities.
Beta
A measure of systematic risk of a stock, the tendency of a stock’s price to correlate with changes in a specific index.
Blockage discount
An amount of percentage deducted from the current market price of a publicly traded stock to reflect the decrease in the per share value of a block of stock that is of a size that could not be sold in a reasonable period of time given normal trading volume.
Business enterprise
A commercial, industrial, service, or investment entity pursuing an economic activity.
Business risk
The degree of uncertainty of realizing expected future returns of the business resulting from factors other than financial leverage.
CAPM
A model in which the cost of capital for any stock or portfolio of stocks equals a risk-free rate plus a risk premium that is proportionate to the systematic risk of the stock or portfolio.
Capitalization
A conversion of a single period of economic benefits into value.
Capitalization factor
Any multiple or divisor used to convert anticipated economic benefits of a single period into value.
Capitalization of earnings method
A method within the income approach whereby economic benefits for a representative single period are converted to value through division by a capitalization rate.
Capitalization rate
Any divisor (usually expressed as a percentage) used to convert anticipated economic benefits of a single period into value.
Capital structure
The composition of the invested capital of a business enterprise, the mix of debt and equity financing.
Common size statements
Financial statements in which each line item is presented as a percentage of the total.
Cost approach
A general way of determining a value indication of an individual asset by quantifying the amount of money required to replace the future service capability of that asset.
Cost of capital
The expected rate of return that the market requires in order to attract funds to a particular investment.
Discount rate
A rate of return used to convert a future monetary sum into present value
DCF model
A method within the income approach whereby the present value of future expected economic benefits is calculated using a discount rate.
Discounted future earnings method
A method within the income approach whereby the present value of future expected economic benefits is calculated using a discount rate.
Economic benefits
Inflows such as revenues, net income, net cash flows, etc.
Equity net cash flows
Those cash flows available to pay out to equity holders (in the form of dividends) after funding operations of the business enterprise, making necessary capital investments, and increasing or decreasing debt financing.
Equity risk premium
A rate of return added to a risk-free rate to reflect the additional risk of equity instruments over the risk free instruments (a component of the cost of equity capital of equity discount rate).
Excess earnings
The amount of anticipated economic benefits that exceeds an appropriate rate of return on the value of a selected asset base (often net tangible assets) used to generate those anticipated economic benefits.
