valuations

Question 1

net asset value

Answer 1

value of the shareholders equity in the case of a company

Question 2

market value

Answer 2

value of the share as determined by external markets

Question 3

market premium

Answer 3

an excess over and above the net asset value

Question 4

goodwill

Answer 4

when a company purchases a major investment ‐the difference between the price paid and the net asset value of the investment

Question 5

intrinsic value

Answer 5

the actual value of a company or an asset based on underlying perception of its true value - including all aspects of the business, in terms of tangible and intangible factors. This value may or may not be the same as the current market value - as stated in investopedia

Question 6

what are the relative valuation techniques

Answer 6

direct comparison - e.g. valuing houses, art, property
using some measurable factor
using some measurable factor - multiples: price earnings ratio, sometimes market to book (NAV) and Price to sales (market ratio)

Question 7

process of doing relative valuations for unlisted company

Answer 7

• calculate earnings per share using financial statements or the earnings total
• adjust the price earnings ratio
  value = adjusted PE ratio x earnings of the non-listed company

Question 8

how do we value small businesses

Answer 8

Multiples such as the net earnings have been used to value small businesses.
so the expected sales before tax and interest would be = projected sales - cost of sales - essential operating expenses

net income before tax and interest would be multiplied by a multiple - usually months

Question 9

what are the discounted cash flow techniques?

Answer 9

we capitalize cash flows

valuing bonds and shares using the dividend growth model

Question 10

what does it mean to capitalize cash flows

Answer 10

determine what amount of an asset gives rise to the cash flow

Question 11

example: (turning an investment into its capital amount) - an investment pays us R100 per year with a fair rate of return of 9%, what is the value of the investment?

Answer 11

R100/0.09 = R111.11

Question 12

what is a coupon

Answer 12

interest rate of a bond

Question 13

how do we value a bond

Answer 13

price of bond = present value of coupon + present value of face value at maturity

Question 14

what are par bonds

Answer 14

coupon rate = market rate

Question 15

what are discount bonds

Answer 15

coupon rate < market rate

Question 16

what are premium bonds

Answer 16

coupon rate > market rate

Question 17

what is yield to maturity?

Answer 17

• a nominal rate which makes the present value of the coupon and principal payments equal to the marker price of the bond

Question 18

what is a perpetuity

Answer 18

investment that pays the same amount every year in perpetuity
most preference shares are perpetuities

Question 19

formula for value of a preference share:

Answer 19

P = Dividend/Required rate

Question 20

what do cash flows refer to in this section

Answer 20

ordinary dividends declared by the company in particular future dividends. If no dividends are declared

Question 21

the rate of return for present valuing (or discounting) could be

Answer 21

simply a rate defined by the valuer - minimum rate that they wish to earn
market rate similar to ordinary shares
our firm’s cost of equity - might be given or have to calculate using capm model

Question 22

zero` growth dividend model

Answer 22

p0 = Dividends/required rate of return on equity

Question 23

constant growth dividend model

Answer 23

p0 = D1 /r-g

D1 = D0 (1+growth rate)