Income Based Valuation Flashcards
The amount of money that the company or the assets will generate over the period if time
Income Based Valuation
The Two opposing theories that investors consider?
The Dividend Irrelevance theory and The Bird-in-hand Theory
Was introduced by Modigliani and Miller that supports the belief that the stock prices are not affected by dividends or the returns on the stock stock but more on the ability and sustainability of the asset or company
The Dividend Irrelevance theory
Believes that dividend or capital gains has an impact on the price of the stock
Bird-in-the hand theory
Is the additional value inputted in the calculation that would account for the increase in value of the firm
Earning Accretion
The amount that is added to the value of the firm in order to fain control of it
Equity Control Premium
Are previous deals or experiences that can be similar with the investment being evaluated
Precedent Transaction
Cost of capital can be computed through?
A. Weighed Average Cost of Capital, and
B. Capital Assets Pricing Model
It can be used to determine the appropriate cost of capital by weighing the portion of the asset funded through equity and debt
Weighed Average Cost of Capital or
(WACC)
What’s (Ke, We, Kd and Wd) stance in WACC?
a. Ka = Cost of Equity
b. We = Weight of the equity financing
c. Kd = Cost of debt after tax
c. Wd = Weight of the debt financing
The formula of WACC is?
WACC = (Ke X We) + (Kd + Wd)
The cost of equity may be also derived by?
Capital Asset Pricing Model or (CAPM)
The formula to be used in CAPM are?
Ke = Rf + B (Rm - Rf)
What’s (Rf, B, and Rm) stance for?
a. Rf = Risk free Rate
b. B = Beta
c. Rm = Market Return
