Financial Valuation Flashcards
Name and describe the different valuation motives regarding changes in the ownership structure
- transactional: change in the ownership structure planned
- dominating: unilaterally
- non-dominating: non-unilaterally
- non-transactional: change in the ownership structure NOT planned
What is the basic principle underlying valuation purposes?
“purpose adequacy principle”: Vauation purposes according to economical doctrine/practise
Name the valuation purposes according to the a) economical doctrine, and b) economical practice.
a) - decision value
- fair market value/standard value (legally impressed value)
- arbitrium value
b) - subjective shareholder
- objective shareholder
- arbitrium value
Is there a a) subjective value?, b) objective value?, and c) objectified value?
a) subjective: yes, the value lies in the eye of the beholder
b) objective: no, there is no objective value
c) objectified: yes, fair market value
What is a “subjective” value?
the value lies in the eyes of the beholder
Arbitrium Value
intermediation between interests of contracting parties
fair
1. calculation of decision values
2. balancing between values
Explain the difference between value and price.
value is what you think it is worth, represents the level of usability
price is what you pay for something, represents the exchange relationship of goods
What is the economical consequence of a transaction exactly at the decision value?
it leaves the assets (economic situation) of the valuation subject unchanged
In what forms does the decision value come?
- upper price limit of the acquirer
- lower price limit of the vendor
in-between: transactional area
What are the main characteristics of the objectified (fair market) value?
- independent of subjective
- realistic future expectation
- valuation by the market
Define the “standard value”?
value primarily considering legal rules
Name and describe the valuation principles.
Principle of:
- decisiveness of the valuation purpose
- relevance of the future: future benefit
- overall valuation: combining effects
- individuality (subjectivity): specific valuation subject/object
- valuing the total assets: essential/non-essential assets
- considering a realistic payout: consistency in planning
- regarding the valuation date: only infos at valuation date
- conservatism
- equivalence
Name and describe the several forms of the principle of equivalence.
equivalence of:
- duration of the income stream
- risk
- income availability
- labor input
- value of money (real vs nominal income)
Principle of equivalence
- duration
- risk
- income availability
- labor input: same input of owners labor
- value of money: nominal vs real income
Who is standard setter in Austria? How is the Austrian valuation standard called?
KFS BW1
Institute for business economics, tax law and organization of the austrian chamber for chartered public accountants and tax consultants
Who is standard setter in Germany? How is the German valuation standard called?
IDW S 1
IDW: Institute of German Chartered Public Accountants
Who are standard setter in the USA? How are their valuation standards called?
SSVS 1 (Statement on standards for valuation services) by AICPA (American institute of certified public account)
USPAP (Uniform Stand. of Professional Appraisal Practice) by AF (Appraisal Foundation=
ASA Business Valuatin Standards (BSB) by ASA (American Society of Appraisers)
BAS by IBA
NAVCA Professional Standards (NPS) by NACVA (Notional accociation of certified Valuation analysts)
Who are international standard setter? How are their valuation standards called?
IACVA/EACVA Professional Standards (IPS/EPS) by International/European Association of Consultants, Valuers and Analysts
International Valuation Standards (IVS) by IVSC (… Council)
Give an overview of the different valuation approaches.
- Income approach
- DCF-Approach: Entity-based (WACC), Equity-based, APV-approach
- Market approach:
- Comparative Company approach
- Asset approach: asset/liquidation value
- Combined approach
Whats the fundamental difference between DCF-Approaches
“tax shield”: how the use of depth affects the tax benefit in value
consistent assumptions concerning planning depth and equity will result in the same shareholder value
Explain the difference between gross procedures and net procedures within the DCF-Approach.
gross procedures: shareholder value computed indirectly
- Entity-approach (WCAA)
- APV-approach
net procedures: shareholder value computed directly
- Equity-approach
Name the different DCF-Methods.
gross procedures: shareholder value computed indirectly
- Entity-approach (WACC)
- APV-approach
net procedures: shareholder value computed directly
- Equity-approach
Explain the Entity-Approach. Draw a diagram.
Free cashflow
Complete equity financing:
- income tax effects cause by debt financ. disregarded
- mixed discount rate
What is free cashflow?
distributable cashflow to both equity investors and debt capital providers
Explain the APV-Approach. Draw a diagram.
Adjusted Present Value Approach
free cash flow, complete equity financing same as in entity-approach
“tax shield”: income tax savings due to tax deductibility of interest on debt
Tax shield is added to the virtually unlevered (using zero debt) business market value
Explain the Equity-Approach. Draw a diagram.
Flows to Equity (FtE): cashflow only distributable among investors (includes impact of debt financing and tax effects)
FtE are discounted with the cost of equity of the levered business
Describe the two-stage planning model.
First stage:
detailed planning
3 to 5 years
Second stage:
forecast period
constant cash flow or growth trend is assumed
business in steady state
Describe the three-stage planning model.
First stage:
detailed planning
3 to 5 years
First stage:
convergence period
another 5 years
expected and unexpected changes in the market and company
Third stage:
forecast period
constant cash flow or growth trend is assumed
business in steady state
In what forms can the life expectancy of a company be assumed? Which is the standard
assumption?
- finite life expectancy: liquidation or selling
- infinite life expectancy: standard assumption
Explain the computation of the Free Cashflow.
EBIT
- Tax on EBIT
_______________
NOPLAT (net operating profit less adjusted taxes)
- …