Financial Valuation

Question 1

How do you calculate the Annuity Present Value:

Answer 1

Amount of Annuity x (1 - Present Value Factor) / Rate of Return

Present Value Factor = 1 / (1 + r)^t

Question 2

What happens to the present value of an annuity as the following increase: payment amount, risk, or number of payments?

Answer 2

Payment - PV goes up
Risk - PV goes down
# of payments - PV goes up

Question 3

How to calculate the present value of a perpetuity:

Answer 3

Dividend / Required return

Question 4

How to calculate the economic return:

Answer 4

Change in price + dividend income / beginning price

Question 5

How to calculate Value of Equity using the Dividend Discount Model (DDM):

Answer 5

Dividend on year after period / (R - G)

Question 6

How to calculate the P/E ratio:

Answer 6

Stock price / EPS in one year

If not given, EPS = Net Income / # CS Outstanding

Question 7

What is the most widely used multiple to value equity securities?

Answer 7

P/E Ratio

Earnings are a key driver of investment value

Question 8

How to calculate a Trailing P/E Ratio:

Answer 8

Stock Price / EPS for the past year

Question 9

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.

Answer 9

PEG Ratio

Question 10

Is a lower or higher PEG ratio more attractive to investors?

Answer 10

Lower - shows they might be undervalued

Question 11

How to calculate a PEG Ratio?

Answer 11

( stock price / Expected EPS) / Growth Rate

Question 12

Price to sales ratio is calculated by:

Answer 12

Stock price / expected sales

Expected sales = sales / # CS outstanding

Question 13

Price to cash flow ratio is calculated by:

Answer 13

Stock price / expected cash flow

Cash flow = CF / # CS outstanding

Question 14

The price to book ratio is calculated by:

Answer 14

Stock price / book value of common equity today

To find the BV = A - L - PE = Current Equity / # CS outstanding = BV per share

Question 15

What is a contract that entitles the owner to buy or sell a stock at a given price within a stated period of time?

Answer 15

Option

Question 16

What style of option can be exercised at any time prior to their expiration?

Answer 16

American style

Question 17

What style of option can only be exercised at the expiration or maturity date?

Answer 17

European style

Question 18

All of the following determinants increase the value of the call option:

Answer 18

Higher current price of underlying stock
Higher risk free interest rate
Longer time until expiration
Higher risk for the underlying stock
Lower exercise price

Question 19

Under the black-scholes model, options are what style?

Answer 19

European

Question 20

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 :

Answer 20

Binomial Model

Question 21

What are four methods for valuing tangible assets? (CALM)

Answer 21

Cost method
Market value method
Appraisal method
Liquidation value

Question 22

What are the three approaches for valuing intangible assets? (MIC)

Answer 22

Market Approach
Income Approach
Cost Approach

Question 23

When preparing accounting estimates, what 4 factors must management consider?

Answer 23

Historical information
Market information
Expected usage
Estimates from experts

The estimates must also be reviewed and approved by auditors