Equity Valuation: Concepts and Basic Tools

Question 1

In regards to valuation, what is “fundamental valuation”?

Answer 1

A set of strategies used to identify undervalued and unloved companies for which there is a possibility of a corporate rebound, with future revenue and cash flow growth, will result in higher valuations.

Question 2

What are “Present Value Models”?

Answer 2

Valuation models that estimate the intrinsic value of a security as the present value of future benefits expected to be received from the security.

Also called a “discounted cash flow model”

Question 3

What is a DCF?

Answer 3

A valuation model that estimates the intrinsic value of a security as the present value of the future benefits expected to be received from the security.

Question 4

What is the “Dividend discount model” ?

Answer 4

A present value model of stock value that shows the intrinsic value of a stock as the present value of the stock’s expected future dividends.

Question 5

What is a “Free-Cash-Flow-to-Equity” model?

Answer 5

A valuation model based on discounting expected future free cash flow to equity.

Question 6

What are “Multiplier models”?

Answer 6

Valuation models based on share price multiples or enterprise value multiples.

Question 7

What is “Enterprise Value”?

Answer 7

Total company value.

= Debt + Equity - Cash

Question 8

What are Asset-based valuation models?

Answer 8

Valuation models based on estimates of the market value of a company’s assets.

Question 9

What does “Book Value” mean?

Answer 9

The net amount shown for an asset or liability on the company’s balance sheet.

The “book value” may also refer to the company’s excess of total assets over total liabilities. Also called “carrying value”.

Question 10

What is “Carrying Value”?

Answer 10

The carrying value of a fixed-income instrument is the purchase price plus (minus) the amortized amount of the discount (premium) if the bond is purchased at a price below (above) par value.

Question 11

What is a “dividend”?

Answer 11

A distribution paid to shareholders based on the number of shares owned.

Question 12

What is an “Extra Dividend”?

Answer 12

A dividend paid by a company that does not pay dividends on a regular schedule, or a dividend that supplements regular cash dividends with an extra payment.

Question 13

What is a “special dividend”?

Answer 13

A dividend by a company that does not pay dividends on a regular schedule, or a dividend that supplements regular cash dividends with an extra payment.

Question 14

What is a “stock dividend”?

Answer 14

A type of dividend in which a company distributes additional shares of its common stock to shareholders instead of cash. Also known as a bonus issue of shares.

Question 15

What is a “bonus issue of shares”?

Answer 15

A type of dividend in which a company distributes additional shares of its common stock to shareholders instead of cash. Also known as a stock dividend.

Question 16

What is a “Stock Split”?

Answer 16

An increase in the number of shares outstanding with a consequent decrease in share price, but no change to the company’s underlying fundamentals.

Question 17

What is a “Reverse Stock Split”?

Answer 17

A reduction in the number of shares outstanding with a corresponding increase in share price, but no change to the company’s underlying fundamentals.

Question 18

What is a “Share Repurchase”?

Answer 18

A transaction in which a company buys back its own shares. Unlike stock dividends and stock splits, share repurchases use corporate cash. Also known as buybacks.

Question 19

What is a “Buyback”?

Answer 19

A transaction in which a company buys back its own shares. Unlike stock dividends and stock splits, share repurchases use corporate cash.

Question 20

What is a “Declaration Date”?

Answer 20

The day that the corporate issues a statement declaring a specific dividend.

Question 21

What is the “Ex-dividend Date”?

Answer 21

The first date that a share trades without (i.e., “ex”) the right to receive the declared dividend for the period.

Question 22

What is the “holder-of-record” date?

Answer 22

The date that a shareholder listed on the corporation’s books will be deemed to have ownership of the shares for purposes of receiving an upcoming dividend.

Question 23

What is a “payment date”?

Answer 23

The day that the company actually mails out (or electronically transfers) a dividend payment. Also known as the payable date.

Question 24

What is the “Payable Date”?

Answer 24

The day that the company actually mails out (or electronically transfers) a dividend payment.

Question 25

What is a “Terminal Stock Value”?

Answer 25

The expected value of a share at the end of the investment horizon - in effect, the expected selling price.

Question 26

What is a “Preferred Stock”?

Answer 26

A type of equity interest which ranks above common shares with respect to the payment of dividends and the distribution of the company’s net assets upon liquidation.

The preferred stock has characteristics of both debt and equity securities.

Question 27

What is a “Price Multiple”?

Answer 27

A ratio that compares the share price with some sort of monetary flow or value to allow evaluation of the relative worth of a company’s stock.

Question 28

What is the “Law of One Price”?

Answer 28

A principal that states that if you have two investments that have the same or equivalent future cash flows regardless of what will happen in the future, then these two investments should have the same current price.