Financial Valuation Flashcards
How do you calculate the Annuity Present Value:
Amount of Annuity x (1 - Present Value Factor) / Rate of Return
Present Value Factor = 1 / (1 + r)^t
What happens to the present value of an annuity as the following increase: payment amount, risk, or number of payments?
Payment - PV goes up Risk - PV goes down # of payments - PV goes up
How to calculate the present value of a perpetuity:
Dividend / Required return
How to calculate the economic return:
Change in price + dividend income / beginning price
How to calculate Value of Equity using the Dividend Discount Model (DDM):
Dividend on year after period / (R - G)
How to calculate the P/E ratio:
Stock price / EPS in one year
If not given, EPS = Net Income / # CS Outstanding
What is the most widely used multiple to value equity securities?
P/E Ratio
Earnings are a key driver of investment value
How to calculate a Trailing P/E Ratio:
Stock Price / EPS for the past year
What is the measure that shows the effect of earnings growth on a company’s P/E, assuming a linear relationship between P/E and growth.
PEG Ratio
Is a lower or higher PEG ratio more attractive to investors?
Lower - shows they might be undervalued
How to calculate a PEG Ratio?
( stock price / Expected EPS) / Growth Rate
Price to sales ratio is calculated by:
Stock price / expected sales
Expected sales = sales / # CS outstanding
Price to cash flow ratio is calculated by:
Stock price / expected cash flow
Cash flow = CF / # CS outstanding
The price to book ratio is calculated by:
Stock price / book value of common equity today
To find the BV = A - L - PE = Current Equity / # CS outstanding = BV per share
What is a contract that entitles the owner to buy or sell a stock at a given price within a stated period of time?
Option
What style of option can be exercised at any time prior to their expiration?
American style
What style of option can only be exercised at the expiration or maturity date?
European style
All of the following determinants increase the value of the call option:
Higher current price of underlying stock Higher risk free interest rate Longer time until expiration Higher risk for the underlying stock Lower exercise price
Under the black-scholes model, options are what style?
European
A variation of the black-scholes model that is useful for valuing American-style options which can be exercised over a prior of time is called the :
Binomial Model
What are four methods for valuing tangible assets? (CALM)
Cost method
Market value method
Appraisal method
Liquidation value
What are the three approaches for valuing intangible assets? (MIC)
Market Approach
Income Approach
Cost Approach
When preparing accounting estimates, what 4 factors must management consider?
Historical information
Market information
Expected usage
Estimates from experts
The estimates must also be reviewed and approved by auditors
