M7 Financial Valuation Methods: Part 2

Question 1

Biggest assumption for Black-Scholes model (used to value options)

Answer 1

European-style which means exercisable only at maturity

Question 2

Variation of the Black-Scholes model that considers underlying security over a period of time as compared to value at one point in time; America-style options

Answer 2

Binomial Model (Cox-Ross-Rubinstein)

Question 3

How do you find the value of the bond?

Answer 3

Equal to PV of its future cash flows

sum of PVCFs:

C/(1+R) + C/(1+R)^2 + C/(1+R)^3 + (C + PAR)/(1+r)^4

whatever maturity year is you add C plus the principal

C = Face * annual interest rate
R = market rate
PAR = face = principal

Question 4

Mnemonic for valuing tangible assets (PP&E)

Answer 4

CALM
C = Cost Method (NBV = Cost - AD)
A = Appraisal method
L = Liquidation Method
M = Market Value method (replacement cost or NRV)
NRV = SP - costs to sell

Question 5

Mnemonic for valuing INTANGIBLE assets

Answer 5

MIC
M = Market Approach (median, if four numbers take average of middle two)
I = Income approach (DCF)
C = Cost approach (replacement cost and reproduction cost

Question 6

Call options =

Answer 6

Call = Stock price - PV strike

PV strike = strike / (1+r)