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Valuation Methods > Prelims > Flashcards

Prelims Flashcards

1
Q

Individually or collectively has value

A

Asset

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2
Q

Pertains to the worth of an object in another person’s POV

A

Value

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3
Q

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

A

Valuation

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4
Q

“A company creates value if and only if the return on capital invested exceed the xost of acquiring capital”

A

Marshall’s Principle on Creating Value by Alfred Marshall

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5
Q

The 3 Major Factors that can be linked to the Value of Business

A
  1. Current operations
  2. Future prospects
  3. Embedded risk
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6
Q

The value that an investor considers on the basis of an evaluation of available facts, to be the “true” or “real” value

A

Intrinsic Value

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7
Q

The price of an asset when buyer and seller have reasonable knowledge of it and are willing to trade without pressure

A

Fair Market Value

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8
Q

The net value of a company’s physical assets if it were to go out of business and the assets sold

A

Liquidation Value

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9
Q

the value of a company under the assumption that it will continue to operate for the foreseeable future.

A

Going-concern Value

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10
Q

The 5 Roles of Valuation in Business

A
  1. Portfolio Management
  2. Analysis of Business Transactions/Deals
  3. Corporate Finance
  4. Legal and Tax Purposes
  5. Other Purposes
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11
Q

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

A

Portfolio Management

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12
Q

the true value of firm can be estimated by looking at its financial characteristics, its growth prospects, cash flows and risk profile.

A

Fundamental Analyst

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13
Q

tend to look for companies with good growth prospects that have poor management. Activist investors usually do “takeovers”

A

Activists Investors

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14
Q

relies on the concept that stock prices are significantly influenced by how investors think and act

A

Chartists

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15
Q

correlate value and how information will affect this value

A

Information traders

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16
Q

is a particular asset fairly priced, overpriced, underpriced in relation to its prevailing computed intrinsic value and prices of comparable assets

A

Stock selection

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17
Q

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?

A

Deducing market expectations

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18
Q

General term which describes the transaction wherein two companies had their assets combined to form a wholly new entity.

A

Merger

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19
Q

Sale of a major component or segment of a business to another company

A

Divestiture

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20
Q

separating a segment or component business and transforming this into a separate legal entity

A

Spin-off

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21
Q

Acquisition of another business by using significant debt which uses the acquired business as a collator.

A

Buyout

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22
Q

potential increase in firm value that can be generated once two firms merge with each other.

A

Synergy

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23
Q

change in people managing the organization brought about by the acquisition.

A

Control

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24
Q

ensures that financial outcomes and corporate strategy drives maximum of firm value.

A

Corporate Finance

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25
Q

Other Purposes of Valuation

A

· 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

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26
Q

economic conditions industry peculiarities, company strategy and company’s historical performance

A

Factors analyzed

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27
Q

· refers to the inherent technical and economic characteristics of an industry and the trends that may affect this structure.

A

Industry structure

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28
Q

means that these are true to most, if not all, market player participating in that industry.

A

Industry characteristics

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29
Q

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

A

Business model

30
Q

economic environment and industry

A

macro perspective

31
Q

firm’s financial and operating characteristics

A

micro perspective

32
Q

Forecast starts from international or national macroeconomic projections with utmost consideration to industry-specific forecasts

A

Top-down Forecasting Approach

33
Q

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.

A

Bottom-up Forecasting Approach

34
Q

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)

A

SENSITIVITY ANALYSIS

35
Q

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

A

SITUATIONAL ADJUSTMENTS OR SCENARIO MODELLING

36
Q

SIX KEY PRINCIPLES IN VALUATION

A
  1. 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

  1. Market dictates the appropriate rate return for investors
  2. Firm value can be impacted by underlying net tangible assets.
  3. Value is influenced by transferability of future cash flows.
  4. Value is impacted by liquidity.
37
Q

uncertainty will be consistently present.

A

Dini question, reminder lang HAHAHAH

38
Q

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.

A

Uncertainty

39
Q

as transactions that would yield future economic benefits as a result of past transactions.

A

Asset

40
Q

Is highly dependent on the value that the assets will generate from now until the future.

A

Value of investment opportunities

41
Q

is a sensitive and confidential activity in the portfolio management.

A

Valuation

42
Q

value shall be based on pure estimates and these are investments that started from scratch

A

Green Field Investment

43
Q

·investments are already in the going concern state

·considered as Going concern Business Opportunities (GCBOs).

A

Brown Field Investment

44
Q

suggests that risk management principles must be observed in doing businesses and determining its value.

A

Committee of Sponsoring Organization of the Treadway Commission (COSO)

45
Q

is dependent on the economic benefits. (i.e., cash flows) it gives.

A

Asset Value

46
Q

Popular methods used to determine the value using assets as its bases are:

A

· Book Value Method

· Replacement Value Method

· Reproduction Value Method

· Liquidation Value Method

47
Q

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

A

Book Value Method

48
Q

· 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

A

Current assets

49
Q

· are the assets wherein benefits can be realized in more than 12 months

· Benefits can be realized in more than 12 months

A

Noncurrent Asset

50
Q

· 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.

A

Current liabilities

51
Q

· due to be settled longer than 12 months.

A

Noncurrent Liabilities

52
Q

Formula for Net Book Value of Assets

A

(Total Assets - Total Liabilities) ÷ Number of Outstanding Shares

53
Q

Has defined the Replacement Cost as the cost of similar assets that have the nearest equivalent value as of the valuation date.

A

National Association of Valuators and Analysts

54
Q

the value of the individual assets shall be adjusted to reflect the relative value or cost equivalent to replace the asset.

A

Replacement Value Method

55
Q

Formula for Replacement Value per Share

A

(Net book value ± replacement adjustments) ÷ outstanding shares

56
Q

· 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.

A

Age of the asset

57
Q

· This is important for fixed assets particularly real property where assets of the similar size will be compared.

A

Size of the assets

58
Q

· 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.

A

Competitive advantage of the assets

59
Q

· is an estimate of cost of producing, creating, developing, or manufacturing a similar asset.

· This method requires reproduction cost analysis

A

Reproduction Value Method

60
Q

is an equity valuation approach that considers the salvage value as the value of the asset.

A

Liquidation Value Method

61
Q

is a company’s calculation of the minimum return that would be necessary in order to justify undertaking a capital budgeting project.

A

Cost of Capital

62
Q

Two Main Sources of Funding that a company uses to finance its operations and investments:

A
  1. Borrowings (DEBT)
  2. Owners’ money (EQUITY)
63
Q

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.

A

Cost of debt

64
Q

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.

A

Cost of equity

65
Q

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.

A

Weighted Average Cost of Capital (WACC)

66
Q

Formula for WACC

A

WACC= (Equity/Capital x Cost of Equity) + (Debt/Capital x Cost of debt x (1- tax rate)

67
Q

Factors that affect the organization’s Cost of Capital

A

· General Economic Conditions

· Market Conditions

· Operating and Financing Decisions

· Amount of Financing

68
Q

Alternative formula for Cost of Debt

A

Cost of debt= interest rate/proceeds × (1-T)

69
Q

Formula for Cost of Preference Share

A

Cost of preference share= Dividends ÷ (issued price - floatation cost)

70
Q

Formula for Cost of Equity

A

Cost of Equity= Dividends ÷ Net Proceeds

Valuation Methods (1 decks)

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