Prelims Flashcards
Individually or collectively has value
Asset
Pertains to the worth of an object in another person’s POV
Value
It is the estimation of an asset’s value based on variables perceived to be related to the future investment returns, on comparisons with similar assets, or when relevant, an estimates of immediate liquidation proceeds
Valuation
“A company creates value if and only if the return on capital invested exceed the xost of acquiring capital”
Marshall’s Principle on Creating Value by Alfred Marshall
The 3 Major Factors that can be linked to the Value of Business
- Current operations
- Future prospects
- Embedded risk
The value that an investor considers on the basis of an evaluation of available facts, to be the “true” or “real” value
Intrinsic Value
The price of an asset when buyer and seller have reasonable knowledge of it and are willing to trade without pressure
Fair Market Value
The net value of a company’s physical assets if it were to go out of business and the assets sold
Liquidation Value
the value of a company under the assumption that it will continue to operate for the foreseeable future.
Going-concern Value
The 5 Roles of Valuation in Business
- Portfolio Management
- Analysis of Business Transactions/Deals
- Corporate Finance
- Legal and Tax Purposes
- Other Purposes
The process of making strategic decisions about how to invest and manage a collection of assets or investments, known as a portfolio, to achieve specific financial goals while balancing risk and return
Portfolio Management
the true value of firm can be estimated by looking at its financial characteristics, its growth prospects, cash flows and risk profile.
Fundamental Analyst
tend to look for companies with good growth prospects that have poor management. Activist investors usually do “takeovers”
Activists Investors
relies on the concept that stock prices are significantly influenced by how investors think and act
Chartists
correlate value and how information will affect this value
Information traders
is a particular asset fairly priced, overpriced, underpriced in relation to its prevailing computed intrinsic value and prices of comparable assets
Stock selection
which estimates of a firm’s future performance are in line with the prevailing market price of its stocks? Are there assumptions about fundamentals that will justify the prevailing price?
Deducing market expectations
General term which describes the transaction wherein two companies had their assets combined to form a wholly new entity.
Merger
Sale of a major component or segment of a business to another company
Divestiture
separating a segment or component business and transforming this into a separate legal entity
Spin-off
Acquisition of another business by using significant debt which uses the acquired business as a collator.
Buyout
potential increase in firm value that can be generated once two firms merge with each other.
Synergy
change in people managing the organization brought about by the acquisition.
Control
ensures that financial outcomes and corporate strategy drives maximum of firm value.
Corporate Finance
Other Purposes of Valuation
· Issuance of a fairness opinion for valuations provided by third party
· Basis for assessment of potential lending activities by financial institutions.
·Share-based payment / compensation
economic conditions industry peculiarities, company strategy and company’s historical performance
Factors analyzed
· refers to the inherent technical and economic characteristics of an industry and the trends that may affect this structure.
Industry structure
means that these are true to most, if not all, market player participating in that industry.
Industry characteristics
pertains to the method how the company makes money - what are the products or services they offer how they deliver and provide these to customers and their target customers
Business model
economic environment and industry
macro perspective
firm’s financial and operating characteristics
micro perspective
Forecast starts from international or national macroeconomic projections with utmost consideration to industry-specific forecasts
Top-down Forecasting Approach
forecast starts from the lower levels of the firm and is completed as it captures what will happen to the company based on the inputs of its segment/units.
Bottom-up Forecasting Approach
assumptions that are commonly used are sales growth, gross margin rates and discount rates. Aside from these, other variables (like market share, advertising expense, discounts, differentiated feature, etc)
SENSITIVITY ANALYSIS
These factors that do not affect value per share when analysts only look at core business operations but will still influence value regardless. This includes control premium, absence of marketability discount and illiquidity discounts
SITUATIONAL ADJUSTMENTS OR SCENARIO MODELLING
SIX KEY PRINCIPLES IN VALUATION
- The valuation of a business is defined only at a specific point in time.
2.Value varies based on the ability of business to generate future cash flows
- Market dictates the appropriate rate return for investors
- Firm value can be impacted by underlying net tangible assets.
- Value is influenced by transferability of future cash flows.
- Value is impacted by liquidity.
uncertainty will be consistently present.
Dini question, reminder lang HAHAHAH
Refers to the possible range of values where the real firm value lies. Uncertainty is captured in valuation models through cost of capital or discount rate.
Uncertainty
as transactions that would yield future economic benefits as a result of past transactions.
Asset
Is highly dependent on the value that the assets will generate from now until the future.
Value of investment opportunities
is a sensitive and confidential activity in the portfolio management.
Valuation
value shall be based on pure estimates and these are investments that started from scratch
Green Field Investment
·investments are already in the going concern state
·considered as Going concern Business Opportunities (GCBOs).
Brown Field Investment
suggests that risk management principles must be observed in doing businesses and determining its value.
Committee of Sponsoring Organization of the Treadway Commission (COSO)
is dependent on the economic benefits. (i.e., cash flows) it gives.
Asset Value
Popular methods used to determine the value using assets as its bases are:
· Book Value Method
· Replacement Value Method
· Reproduction Value Method
· Liquidation Value Method
value recorded in the accounting records of a company. It is highly dependent on the value of the assets as declared in the audited financial statements
Book Value Method
· expected to be realized within the company’s normal operating cycle.
· realized within 12 months after these transactions were reported, or held primarily for the purpose of trading
Current assets
· are the assets wherein benefits can be realized in more than 12 months
· Benefits can be realized in more than 12 months
Noncurrent Asset
· are expected to be settled within the entity’s normal operating cycle
· settled within 12 months, held for the purpose of trading or if the company does not have ability to settle beyond 12 months.
Current liabilities
· due to be settled longer than 12 months.
Noncurrent Liabilities
Formula for Net Book Value of Assets
(Total Assets - Total Liabilities) ÷ Number of Outstanding Shares
Has defined the Replacement Cost as the cost of similar assets that have the nearest equivalent value as of the valuation date.
National Association of Valuators and Analysts
the value of the individual assets shall be adjusted to reflect the relative value or cost equivalent to replace the asset.
Replacement Value Method
Formula for Replacement Value per Share
(Net book value ± replacement adjustments) ÷ outstanding shares
· This will enable the valuator to determine the costs related in order to upkeep similarly aged assets and whether assets with similar engineering design are still available in the market.
Age of the asset
· This is important for fixed assets particularly real property where assets of the similar size will be compared.
Size of the assets
· Assets which have distinct characteristics are hard to replace. Some valuators combine the value of the similar, separate assets that can perform the function of the distinct asset being valued.
Competitive advantage of the assets
· is an estimate of cost of producing, creating, developing, or manufacturing a similar asset.
· This method requires reproduction cost analysis
Reproduction Value Method
is an equity valuation approach that considers the salvage value as the value of the asset.
Liquidation Value Method
is a company’s calculation of the minimum return that would be necessary in order to justify undertaking a capital budgeting project.
Cost of Capital
Two Main Sources of Funding that a company uses to finance its operations and investments:
- Borrowings (DEBT)
- Owners’ money (EQUITY)
represents the cost a company incurs when it borrows money through loans or by issuing bonds. This cost is essentially the interest rate the company pays to its creditors (lenders or bondholders) for using their money.
Cost of debt
represents the return that shareholders (owners) of a company expect for investing their money in the business. It is the return required by equity investors to compensate them for the risk associated with owning shares in the company.
Cost of equity
is a tool to calculate the overall cost of financing by considering both debt and equity.
This also measures a company’s cost to borrow money given the proportional amounts of each type of debt and equity a company has taken on.
Weighted Average Cost of Capital (WACC)
Formula for WACC
WACC= (Equity/Capital x Cost of Equity) + (Debt/Capital x Cost of debt x (1- tax rate)
Factors that affect the organization’s Cost of Capital
· General Economic Conditions
· Market Conditions
· Operating and Financing Decisions
· Amount of Financing
Alternative formula for Cost of Debt
Cost of debt= interest rate/proceeds × (1-T)
Formula for Cost of Preference Share
Cost of preference share= Dividends ÷ (issued price - floatation cost)
Formula for Cost of Equity
Cost of Equity= Dividends ÷ Net Proceeds
