Introduction to Valuation Flashcards
What is Valuation?
Valuation is the process of determining the present value—by linking the risk and return estimate— of a company or an asset. It can be performed on assets or liabilities.
Going-Concern Value
The value of a company as an operating entity. It depends on the ability to generate future cash flows. A.K.A value in use
Liquidation Value
the net amount of money that could be realized by selling the entity’s assets after paying off the liabilities.
Liquidation value per share
the actual amount per share of common stock that stockholders would receive if the entity sells all assets, pays all liabilities and preferred stockholders, then divides the remaining money among common stockholders
Book Value
the value at which as asset is carried on a balance sheet
Book Value of asset
The accounting value of asset, the cost of a fixed asset less its accumulated depreciation
Book value of a liability
its carrying value
Firm’s book value
total assets less total liabilities less preferred stock.
Equivalent to common stockholders’ equity
Book value per share of common stock
ratio of stockholders’ equity to the number of common shares outstanding
Market Value
market price at which investors buy or sell an asset at a given time
Critical determinant of market value
supply and demand
Intrinsic Value
a measure of the theoretical value of an asset
a concept that refers to a security’s perceived value based on future earnings or other attributes of the entity that are not related to a security’s market value
Purpose of valuation
to track the effectiveness of one’s strategic decision-making process and provide the ability to track performance in terms of the estimated change in value, not just in revenue
What are the two common valuations?
Asset Valuation and Equity Valuation
What is asset valuation?
the process of determining the fair market value or present value of assets—either tangible or intangible— using book values, absolute valuation models or comparables.
What is equity valuation?
refer to all tools and techniques used to find out the actual value of a company’s equity.
The most crucial element of a successful investment decision
Equity Valuation
What are the three main valuation methods?
DCF Analysis
Comparable Company Analysis
Precedent Transactions
Discounted Cash Flow (DCF) Analysis
an intrinsic value approach where one forecasts the future business free cash flow and discounts it back at the present day.
What is the most detailed, requires the most assumptions, and often produces the highest value, often resulting in the most accurate valuation approach?
DCF Analysis
Comparable Analysis
a relative valuation method that can be compared to the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA or other ratios.
Comparable analysis is sometimes called…
trading multiples or public market multiples
Most common valuation method, easy to calculate and always current
Multiples of EBITDA
Precedent Transactions
analyses that can be compared to the subject company to other businesses that have recently been sold or acquired in the same industry. Transaction values include the take-over premium included in the price for which they were acquired
Two basic methods of valuing equity stock
absolute evaluation and relative evaluation
Two general approaches in valuation techniques
discounted cash flow valuation techniques
relative valuation techniques
What are discounted cash flow valuation techniques?
the value of the stock is estimated based upon the present value of some measure of cash flow, including dividends, operating cash flow, and free cash flow
What are relative valuation techniques?
the value of a stock is estimated based upon its current price relative to variables considered to be significant to valuation such as earnings, cash flow, book value of sales.
What are some of absolute valuation techniques?
Discounted Dividends
Discounted Residual Income
Discounted Free Cash Flow
Discounted Dividends
the most straighftforward measure of cash flow is dividends because these are cash flows that go directly to the investors. This technique is challenging to apply to firms that do not pay dividends during periods of high growth or currently pay minimal dividends because they have a high return rate.
Discounted Residual Income
the operating free cash flow, generally described as cash flows after direct costs and before any payments to capital suppliers are made.
Discounted Free Cash Flow
free cash flow to equity, a measure of cash flows available to the equity holders after payments to debt holders and after allowing for expenditures to maintain the company’s asset base
Advantage of relative valuation over discounted cash flow/ absolute valuation
relative valuation provide information about how the market is currently valuing the stock at several levels: the aggregate market, alternate industries, and individual stocks within industries.
