19 - Equity Valuation : Applications and Processes

Question 1

intrinsic value (IV)

Answer 1

valuation of an asset or security by someone who has complete understanding of the characteristics of the asset or issuing firm.

Question 2

Actual Mispricing and Valuation Error Formula

Answer 2

Question 3

liquidation value

Answer 3

The liquidation value is the estimate of what the assets of the firm would bring if sold separately, net of the company’s liabilities.

Question 4

Investment value

Answer 4

value of a stock to a particular buyer. Investment value may depend on the buyer’s specific needs and expectations, as well as perceived synergies with existing buyer assets.

Question 5

When valuing a company, an analyst should be aware of the purpose of valuation. For most investment decisions… For acquisitions…

Answer 5

For most investment decisions, intrinsic value is the relevant concept of value.
For acquisitions, investment value may be more appropriate.

Question 6

The general steps in the equity valuation process are:

Answer 6

1- Understand the business.
2 - Forecast company performance.
3 - Select the appropriate valuation model.
4 - Convert the forecasts into a valuation.
5 - Apply the valuation conclusions.

Question 7

The five elements of industry structure as developed by Professor Michael Porter are:

Answer 7

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.

Question 8

There are three generic strategies a company may employ in order to compete and generate profits:

Answer 8

Cost leadership
Product differentiation
Focus:

Question 9

Absolute valuation models

Answer 9

estimates an asset’s intrinsic value, which is its value arising from its investment characteristics without regard to the value of other firms.
eg -Dividend discount models

Question 10

Relative valuation models.

Answer 10

determine the value of an asset in relation to the values of other assets.
eg - PE Ratio

Question 11

Three explanations for conglomerate discounts are:

Answer 11

1 - Internal capital inefficiency
2- Endogenous (internal) factors: For example, the company may have pursued unrelated business acquisitions to hide poor operating performance.
3 - Research measurement errors: Some hypothesize that conglomerate discounts do not exist but rather are a result of incorrect measurement.

Question 12

Conglomerate discount

Answer 12

based on the idea that investors apply a markdown to the value of a company that operates in multiple unrelated industries