Reading 30 - Equity Valuation Flashcards
What are the 5 types of value for equities?
- Intrinsic Value
- Going Concern Value
- Liquidation Value
- Fair Market Value
- Investment Value
What does the Intrinsic Value of an asset mean?
Value of the asset given a hypothetically complete understanding of the asset’s investment characterstics
If a stocks price differs from it’s intrinsic value, what are the two reasons this can occur?
- Actual Mispricing - The IV (actual) minus the actual price
- Valuation Error - The IV calculated by the analyst minus the IV (actual)
What is the Rational Efficient Markets Formulation?
That investors will not rationally incur the expenses of gathering information unless they expect to get higher returns
What is Alpha?
The abnormal return. An excess risk adjusted return
Describe the Going Concern Value of an Equity
Assumption that the company will continue its business activities into the foreseeable future
Describe the Liquidation Value of an Equity
the value of an equity if it were dissolved and its assets were sold off individually
Describe Fair Market Value of an Equity
price at which an asset would change hands between a willing buyer and willing sellers… ie neither “needs” to make the transaction
Describe the Investment Value of an Equity
Asset may be worth more to a specific buyer because of potential synergies
Analysts use valuation concepts and models to accomplish the following 3 things?
- Selecting Stocks
- Inferring Market Expectations
- Evaluating Corporate Events
How is equity valuation used to ‘Infer Market Expectations’ regarding a stock or industry?
- What assumptions about the fundamentals would justify the current price
- compare the expectations implied by the market price vs own expectations
- market’s expectations for one company may be useul as a benchmark for another company
What are the 5 steps of the Equity Valuation process?
- Understanding the business
- Forecasting Company Performance
- Selecting Appropriate valuation model
- Converting forecasts to a valuation
- Apply the valuation conclusions
How does industry and competetive analysis help understand the business?
Similar economic and technological factors typically affect all companies in an industry. The primary usefulness is that the analysis give appropriate attention to the most important economic drives of the business.
What is senstivity analysis in regards to understanding the business?
analysis to determine how changes in an assumed input would affect the outcome of an analysis.
What are Porter’s 5 Forces for industry structure?
- Intra-Industry Rivalry - lower rivalry among industry participants enhannces industry profitability
- New Entrants - high costs to enter and/or barriers to entry enhance industry profitability
- Substitutes - with few other options available for customers, the company can easily raise prices which enhances profitabilty
- Supplier Power - when there are lots of suppliers for an input they cannot raise prices.
- Buyer Power - when many buyers exists for a product, they can’t negotiate a lower price