FIG

Question 1

Why is it difficult to value financial services firms?

Two reasons

Answer 1

First, cash flows to financial services firms cannot be easily estimated because capex, working capital and debt are not clearly defined

Second, Financial services firms are subject to regulation governs how they are capitalized, where they can invest and how fast they can grow

Question 2

What are four key differences that financial services firms are different from other firms

Answer 2

1. Operate under strict regulatory constraints and capital requirements
2. Earnings and cash flow’s don’t make sense
3. Debt is an input rather than a source of capital
4. Capex and working capital are hard to define