Introduction to asset valuation Flashcards

1
Q

what are the types of value

A
  1. Going concern value = value of assets working together

2. Liquidation Value = sum of each asset

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2
Q

If conditions are same which is better liquidation or going concern

A

Going concern because they can have synergys

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3
Q

What is valuation

A

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)

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4
Q

comment on the statement

A valuation is an objective search for intrinsic value

A

all valuations are bias

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5
Q

comment on the statement

a good valuation provides a precise estimate of value

A

false

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6
Q

How can you select a valuation model

A
  1. Characteristics of the company being valued
  2. Availability and quality of the data
  3. Purpose of valuation
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7
Q

how does selection of valuation model change when the characteristics of the company being valued

A

if a company has no similar comparable assets. Can we use a relative valuation model?

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8
Q

how does selection of valuation model change when the availability and quality of data changes

A
  1. a company has never paid dividends and no other information exists to assess its future dividend policy
  2. a company has highly volatile or persistently negative earnings. Can we use P/E
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9
Q

how does selection of valuation model change when the purpose of the valuation changes

A
  1. an investor is seeking a controlling equity position in a company DCF or DDM? DCF
  2. An investor would like to hold for a single period DCF or P/E? P/E
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10
Q

What is an absolute valuation model

A

an estimate of an assets intrinsic value that can be compared with its market price
e.g DCF

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11
Q

What information is needed for DCF

A
  1. life of the asset
  2. cashflow
  3. discount rate
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12
Q

What is a relative valuation model

A

an assets multiples compared with another similar asset Ie market price of A and market price of B

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13
Q

What multiples are there

A
  1. Earnings multiple
  2. Book value (of equity)
  3. sales
  4. cashflow
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14
Q

earnings multiple formula

A

Price/earnings

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15
Q

Book value multiple formula

A

Price/book value

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16
Q

Sales multiples formula

A

price/sales

17
Q

cashflow multiples formula

A

price/ cashflow

18
Q

what is the philosophy of relative valuation mdoel

A

similar assets should sell at similar prices

19
Q

What information do you need for RVM

A
  1. an identical asset
  2. standardised measure of value
  3. and if the variables are not perfectly comparable, variables to control for the differences
20
Q

Is DCF absolute or relative

A

Absolute

21
Q

Is multiples absolute or relative

A

relative

22
Q

DCF vs multiples

exposed to the market perceptions and moods

A

DCF less

Multiples more but take advantage of market perception and moods ie want to sell a security at that price today

23
Q

DCF vs multiples

help to understand the business

A

DCF helpful

multiples less helpful

24
Q

DCF vs multiples

Inputs required

A

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

25
Q

DCF vs multiples

selecting a portfolio with some stocks undervalued and some overvalued

A

DCF difficult

Multiples easy, but difficult to find similar assets and similar assets might be mispricing

26
Q

demirakos et al 2004

what does it show

A

earnings multiples are most popular

27
Q

glaum and friedreich 2006

what does it show

A

popularity of DCF becoming more popular since 1990s

28
Q

Arnold and Mozier 1984

what does it show

A

PE ratio is most popular method of valuation

29
Q

what is the valuations process

A
  1. Understand the business - copr strat anal
  2. FS anal
  3. Performance forecast
  4. selecting an appropriate valuation model
  5. Converting forecasts to a valuation
  6. Make investment decision
    MAKE SURE TO TALK ABOUT PROFIT
30
Q

How can you understand the business/ analyse

A

ANALYSE environment, industry and corporate strategy

Analyse profits

31
Q

What frameworks can you use to understand the business

A

PEST - national/global
porter five forces - industry
SWOT - firm

32
Q

what techniques are there for FS anal

A
  1. Common size anal
  2. trend anal
  3. ratio anal
  4. segmental anal
  5. multivariate anal
33
Q

what are techniques for performance forecasts

A

use historical data to predict performance.

EPS

34
Q

How can you select a valuation model

A

1 Characteristics of the company being valued
2. availability and quality of data
3. purpose of valuation
MUST BE ABLE TO DISCUSS THESE POINTS

35
Q

Converting forecasts to a valuations techniques

A
  1. Sensitivity analysis - discount rates, growth rate forecasts
  2. Situational adjustments - control premium, lack of marketebility, illiquidity discount
    (have snesitivity analysis and maybe situational adjustments section in diss)