Reading 20: Equity Valuation (Applications and Processes) Flashcards
Intrinsic Value
-the valuation of an asset or security by someone who has complete understanding of the characteristics of the asset or issuing firm.
Mispricing
IVanalyst - price = (IVactual - price) + (IVanalyst - IVactual)
-actual mispricing vs valuation error
Going concern
-assumption that the a company will continue to operate as a business, as opposed to going out of business
Liquidation firm
- used when you cannot assume going concern
- estimate of what the assets of the firm would bring if sold separately, net of a company’s liabilities
Fair market value
-price at which a hypothetical, informed and able seller would trade an asset to a willing, informed and able buyer.
Investment Value
-Value of stock to a particular buyer (think synergies)
Five elements of industry culture
1) Threat of new entrants in the industry
2) Threat of substitutes
3) Bargaining power of buyers
4) Bargaining power of suppliers
5) Rivalry among existing competitors.
Strategies to compete and generate profits
1) Cost leadership
2) Product differentiation
3) Focus: competitive advantage in specific industry
Quality of fin statements categories
- accelerating or premature recognition of income
- reclassifying gains and nonoperating income
- expense recognition and losses
- amortization, depreciation and discount rates
- off-balance-sheet issues
Absolute variation models
-measures intrinsic value w/o regard to another firm.
Ex:
-dividend discount models or PV of cash flows
-asset based models
Relative valuation models
-value of asset in relation to other assets
Ex:
-EPS
-P/E ratio
Conglomerate discount
- idea that investors apply a markdown to the value of a company that operates in multiple unrelated industries, compared to the value a company that has a single industry focus. Why?
1) internal capital inefficiency
2) endogenous factors: pursed unrelated business to hide poor operating performance
3) research measurement errors: the discount doesn’t exist
