Introduction to asset valuation Flashcards
what are the types of value
- Going concern value = value of assets working together
2. Liquidation Value = sum of each asset
If conditions are same which is better liquidation or going concern
Going concern because they can have synergys
What is valuation
the estimation of the asset value (intrinsic value) based either on variables (absolute valuation methods) perceived to be related to future investment returns or on comparisons with similar assets (relative valuation methods)
comment on the statement
A valuation is an objective search for intrinsic value
all valuations are bias
comment on the statement
a good valuation provides a precise estimate of value
false
How can you select a valuation model
- Characteristics of the company being valued
- Availability and quality of the data
- Purpose of valuation
how does selection of valuation model change when the characteristics of the company being valued
if a company has no similar comparable assets. Can we use a relative valuation model?
how does selection of valuation model change when the availability and quality of data changes
- a company has never paid dividends and no other information exists to assess its future dividend policy
- a company has highly volatile or persistently negative earnings. Can we use P/E
how does selection of valuation model change when the purpose of the valuation changes
- an investor is seeking a controlling equity position in a company DCF or DDM? DCF
- An investor would like to hold for a single period DCF or P/E? P/E
What is an absolute valuation model
an estimate of an assets intrinsic value that can be compared with its market price
e.g DCF
What information is needed for DCF
- life of the asset
- cashflow
- discount rate
What is a relative valuation model
an assets multiples compared with another similar asset Ie market price of A and market price of B
What multiples are there
- Earnings multiple
- Book value (of equity)
- sales
- cashflow
earnings multiple formula
Price/earnings
Book value multiple formula
Price/book value
Sales multiples formula
price/sales
cashflow multiples formula
price/ cashflow
what is the philosophy of relative valuation mdoel
similar assets should sell at similar prices
What information do you need for RVM
- an identical asset
- standardised measure of value
- and if the variables are not perfectly comparable, variables to control for the differences
Is DCF absolute or relative
Absolute
Is multiples absolute or relative
relative
DCF vs multiples
exposed to the market perceptions and moods
DCF less
Multiples more but take advantage of market perception and moods ie want to sell a security at that price today
DCF vs multiples
help to understand the business
DCF helpful
multiples less helpful
DCF vs multiples
Inputs required
DCF more but inputs can be manipulated by the analyst to provide the conclusion he or she wants
Multiples less, but require more information when controlling for differences
DCF vs multiples
selecting a portfolio with some stocks undervalued and some overvalued
DCF difficult
Multiples easy, but difficult to find similar assets and similar assets might be mispricing
demirakos et al 2004
what does it show
earnings multiples are most popular
glaum and friedreich 2006
what does it show
popularity of DCF becoming more popular since 1990s
Arnold and Mozier 1984
what does it show
PE ratio is most popular method of valuation
what is the valuations process
- Understand the business - copr strat anal
- FS anal
- Performance forecast
- selecting an appropriate valuation model
- Converting forecasts to a valuation
- Make investment decision
MAKE SURE TO TALK ABOUT PROFIT
How can you understand the business/ analyse
ANALYSE environment, industry and corporate strategy
Analyse profits
What frameworks can you use to understand the business
PEST - national/global
porter five forces - industry
SWOT - firm
what techniques are there for FS anal
- Common size anal
- trend anal
- ratio anal
- segmental anal
- multivariate anal
what are techniques for performance forecasts
use historical data to predict performance.
EPS
How can you select a valuation model
1 Characteristics of the company being valued
2. availability and quality of data
3. purpose of valuation
MUST BE ABLE TO DISCUSS THESE POINTS
Converting forecasts to a valuations techniques
- Sensitivity analysis - discount rates, growth rate forecasts
- Situational adjustments - control premium, lack of marketebility, illiquidity discount
(have snesitivity analysis and maybe situational adjustments section in diss)
