Q1 Flashcards
1
Q
Sensitivity Analysis - Strengths (3)
A
- Presented in a way that facilitates subjective judgement
- Identifies critical areas that need to be monitored
- No complicated theory / relatively straightforward
2
Q
Sensitivity Analysis - Weaknesses (3)
A
- Only one factor can be analysed at a time (and presumes these can be changed independently)
- Only identifies how far a variable needs to change (doesn’t consider probability)
- Info provides basis for decisions, not correct decision
3
Q
Simulation - Strengths (2)
A
- Provides information about possible outcomes as well as their relative probabilities.
- Useful for problems which cannot be solved analytically.
4
Q
Simulation - Weaknesses (3)
A
- Not a technique for making a decision, only for obtaining info about possible outcomes.
- Can be expensive to design and run for complex projects.
- Monte Carlo techniques require assumptions for probability distributions and relationships between variables.
5
Q
Real Options - Definition
A
- True worth of a project not always easy to identify
- May be unquantifiable, intangible issues that affect the investment
- Real options represent these intangible factors that may influence a decision
6
Q
Real Options - Different Types (5)
A
- ‘Follow-on’: subsequent benefits might follow a project
- ‘Abandonment’: even if the project fails, the result may not be too bad (e.g. compared to another project)
- ‘Timing’: project allows for timing flexibility (e.g. development rights over land for 5 years)
7
Q
Shareholder Value Analysis - Value Drivers (7)
A
S - Sales growth rate L - Life of projected cash flows O - Operating profit margin W - Investment in working capital C - Cost of capital A - Investment in non-current assets T - Corporation tax rate
8
Q
Asset-Based Valuation - Strengths (3)
A
- Simple to calculate
- Assets are more certain than income
- Useful for ‘asset strippers’
9
Q
Asset-Based Valuation - Weaknesses (3)
A
- Book values are likely to be out of date
- Ignores future earnings
- Service businesses would be undervalued due to value of intangibles
10
Q
Income-Based Valuation - Strengths (2)
A
- Technically the best method, especially for service businesses
- Incorporates all available relevant cash flows and the time value of money
11
Q
Income-Based Valuation - Weaknesses (2)
A
- Estimated cash flows may be too optimistic (especially the terminal value of a perpetuity)
- Calculating a suitable discount rate can be problematic (especially for unlisted companies)
12
Q
PE Ratio Valuation - Strengths (2)
A
- Reflects the stock market’s view of the potential of a company
- Considers the earnings-creating potential of a company
13
Q
PE Ratio Valuation - Weaknesses (3)
A
- Industry average / proxy company’s PE ratio may not reflect the company being valued
- Earnings can be manipulated by accounting policies
- Using past earnings may not reflect future potential
14
Q
Enterprise / EBITDA Multiple Valuation - Strengths (4)
A
- Unaffected by capital structure / depreciation policies
- Takes net debt into account
- Enables direct comparisons between companies which might have different accounting policies
- Technique most commonly used by investors
15
Q
Enterprise / EBITDA Multiple Valuation - Weaknesses (4)
A
- Is simplistic; lot of info from many value drivers distilled into a single figure
- Ignoring capex and tax can be a disadvantage (management can add value through tax know-how)
- Using past earnings may not reflect future potential
- Industry average / proxy multiple may not reflect company being valued