Introduction to valuation Flashcards
What is valuation and who needs it?
Valuation is the process of determining a value of any asset; financial or real. It’s used by investment banks, private equity firms, Corporations in consulting firms (M&A) and strategic investors.
Which of the below are the fundamental skills in valuation?
a) Business economics and strategy
b) Theory and techniques of finance
c) Economic theory
d) Reorganizing financials
e) a, b and d
f) a, b and c
f) a, b and c.
The reorganizing is a crucial skill, but is covered in the ‘theory and techniques of finance’.
What are the three main philosophies to value a company or any asset?
Income approach, Market approach and cost approach.
Which of the below describe the market approach?
a) Expresses the value of a company or an investment as a function of the expected returns it generates. The risk factor is included, and the model is characterized by its long term view. DCF falls into this approach.
b) This method is empirical: valuations are performed through a comparison with comparable assets, with respect to a driver, traded on the market. This approach assume market prices of comparable assets, and are usually linked to trading- and deal multiples.
c) In this approach the value is calculated of all individual items on the balance sheet. Each item is revalued at current conditions. This model does not consider profitability, only investments.
b) This method is empirical: valuations are performed through a comparison with comparable assets, with respect to a driver, traded on the market. This approach assume market prices of comparable assets, and are usually linked to trading- and deal multiples.
Which of the below describe the cost approach?
a) Expresses the value of a company or an investment as a function of the expected returns it generates. The risk factor is included, and the model is characterized by its long term view. DCF falls into this approach.
b) This method is empirical: valuations are performed through a comparison with comparable assets, with respect to a driver, traded on the market. This approach assume market priced of comparable assets, and are usually linked to trading- and deal multiples.
c) In this approach the value is calculated of all individual items on the balance sheet. Each item is revalued at current conditions. This model does not consider profitability, only investments.
c) In this approach the value is calculated of all individual items on the balance sheet. Each item is revalued at current conditions. This model does not consider profitability, only investments.
Which of the below describe the income approach?
a) Expresses the value of a company or an investment as a function of the expected returns it generates. The risk factor is included, and the model is characterized by its long term view. DCF falls into this approach.
b) This method is empirical: valuations are performed through a comparison with comparable assets, with respect to a driver, traded on the market. This approach assume market priced of comparable assets, and are usually linked to trading- and deal multiples.
c) In this approach the value is calculated of all individual items on the balance sheet. Each item is rev valued at current conditions. This model does not consider profitability, only investments.
a) Expresses the value of a company or an investment as a function of the expected returns it generates. The risk factor is included, and the model is characterized by its long term view. DCF falls into this approach.
Which of the following are required in the DCF-model?
a) Cash flows
b) Risk free rate
c) Discount rate
d) A time horizon
e) Tax rate
e) a, b, c and d
f) a, c and d
g) a, c, d, and e
h) All of the above
f) a, c and d
What is not true about DCF valuation?
a) DCF valuation is based upon an asset’s fundamentals. Thus, it should be less exposed to market moods and perceptions and therefore less volatile than market multiples.
b) In DCF valuation the underlying characteristics of the firm are insignificant.
c) It requires more inputs and information than other valuation methods. Estimation of these inputs is the hard part of the model.
d) Inputs can be manipulated by analysts to provide the conclusion they want. This is a significant con of the model.
(b) is NOT TRUE. DCF valuation forces analysts to think about the underlying characteristics of the firm and to understand its business. The business is based on the company’s fundamentals.
True or false.
New ventures, or firms that develop innovative strategies, face a different kind of uncertainty than traditional or consolidated industries. In fact, in traditional industries historical information helps to identify systematic correlations between the economic environment and a firm’s expected results.
True.
What are the two basic, underlying assumptions of the relative valuation method?
(1) The market is efficient.
(2) The value of an asset is whatever the market is willing to pay for it (based upon its characteristics.
Which of the following are inputs in a relative valuation approach (several answers)?
a) Cash flows
b) Tax rate
c) A group of comparable or similar assets
d) A standardized measure of value
e) A discount rate
f) Variables to offset differences, if the assets are not perfectly comparable
g) A time horizon
c, d and f
What are true about the relative valuation method (several answers)?
a) It’s a simple model that are easy to relate to
b) It requires more information than the DCF model
c) Relative valuation is more likely to reflect market perceptions and moods than DCF.
d) Given that no two firms are exactly alike on terms of risk and growth, the definition of comparable firms is subjective. This can be seen as a con of the valuation method.
e) Multiples are easy to misuse and manipulate.
f) The model does not have a tendency to pro-cyclicality. Overvaluation in the market is not related to an overvaluation of an IPO based on the same market multiples.
a, c, d and e.
(b) is not true, it is actually the opposite. Relative valuation generally require less information than DCF (especially when multiples are used as screens).
(f) is not true. There are a tendency to pro-cyclicality related to the model. If the market overvalues all computer software firms, using the average P/E ratio of these firms to value an IPO will lead to an overvaluation of the company going public.
In what situation can asset based methods and DCF yield the same values?
Asset based methods and DCF may yield the same values if we have a firm that has no growth assets and the market assessment of value reflect the expected cash flows.
How is a new venture valued? (Based on uncertainty and managerial flexibility)
Value of a new venture=Basecase value in a standalone scenario+Value generated by new choices and opportunities
