CHAPTER 1

Question 1

Based on the root word itself which is ‘’value’’ it connotes that value pertains to the worth of an object in another person’s point of view

Answer 1

Valuation

Question 2

According to the CFA Institute, this is the estimation of an asset’s value based on variables perceived to be related to future investment returns, on comparisons with similar assets, or, when relevant, on estimates of immediate liquidation proceeds.

Answer 2

Valuation

Question 3

It includes the use of forecasts to come up with reasonable estimate of value of an entity’s assets or its equity. At varying levels, decisions done within a firm entails valuation implicitly.

Answer 3

Valuation

Question 4

places great emphasis on the professional judgment that are associated in the
exercise.

Answer 4

Valuation

Question 5

4 Concepts of Valuation

Answer 5

1. Intrinsic Value
2. Going Concern Value
3. Liquidation Value
4. Fair Market Value

Question 6

refers to the value of any asset based on the assumption that there is a hypothetical complete understanding of its investment characteristics.

Answer 6

Intrinsic Value

Question 7

is the value that an investor considers on the basis of an evaluation of available facts, to be the ‘’true’’ or “real” value that will become the market value when other investors reach the same conclusion.

Answer 7

Intrinsic Value

Question 8

They should be able to come up with accurate forecasts and
determine the right valuation model that will yield a good estimate of a firm’s intrinsic value.

Answer 8

Financial Analysts

Question 9

believes that the entity will continue to do its business into the foreseeable
future. It is assumed that the entity will realize assets and pay obligations in the normal course.

Answer 9

Going Concern Value

Question 10

The net amount that would be realized if the business is terminated and the assets are sold piecemeal.
Firm value is computed based on the assumption that entity will be dissolved,
and its assets will be sold individually.

Answer 10

Liquidation Value

Question 11

is particularly relevant for companies who are experiencing severe financial distress.

Answer 11

Liquidation Value

Question 12

the price, expressed in terms of cash equivalents, at which property
would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when
neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.

Answer 12

Fair Market Value

Question 13

assumes that both parties are
informed of all material characteristics about the investment that might influence their decision. It is often used in valuation exercises involving tax assessments.

Answer 13

Fair Market Value

Question 14

includes performing industry and competitive analysis and analysis of publicly available financial information and corporate disclosures.
This is very important as these give analysts and investors the idea about the following factors: economic conditions, industry peculiarities, company strategy and company’s historical performance.

Answer 14

Understanding of the Business

Question 15

Valuation Process

Answer 15

1. Understanding the Business
2. Forecasting Financial Performance
3. Selecting the right valuation model
4. Preparing valuation model based on forecast
5. Applying Valuation Conclusions and providing recommendations

Question 16

Porter’s Five Forces

Answer 16

a. Industry Rivalry
b. New Entrants
c. Substitutes and Complements
d. Supplier power
e. Buyer power

Question 17

Generic corporate strategies to achieve competitive advantage:

Answer 17

 Cost leadership
 Differentiation
 Focus

Question 18

It relates to the incurrence of the lowest cost among market players with quality that is comparable to competitors allow the firm to price products around the industry average.

Answer 18

Cost Leadership

Question 19

Firms tend to offer differentiated or unique product or service characteristics that customers are willing to pay for an additional premium.

Answer 19

Differentiation

Question 20

Firms are identifying specific demographic segment or category to focus on by using cost leadership strategy (cost focus) or differentiation strategy (differentiation focus).

Answer 20

Focus

Question 21

These are persons who are interested in
understanding and measuring the intrinsic value of a firm.

Answer 21

Fundamental Analysts

Question 22

They tend to be mostly interested in purchasing shares that are
existing and priced at less than their true value.

Answer 22

Value Investors

Question 23

They lean towards growth assets (businesses that might
not be profitable now but has high expected value in future years) and purchasing these at a discount.

Answer 23

Growth Investors

Question 24

tend to look for companies with good growth prospects that have poor management.
They usually do “takeovers” — they use their equity holdings to push old
management out of the company and change the way the company is run.

Answer 24

Activist Investors

Question 25

relies on the concept that stock prices are significantly influenced by how investors think and act. They rely on available trading KPIs such as price movements, trading volume, and short sales when making their investment decisions. They believe that these metrics imply investor psychology and will predict future movements in stock prices.

Answer 25

Chartists

Question 26

assume that stock price changes and follow predictable patterns since investors make decisions based on their emotions than by rational analysis.

Answer 26

Chartists

Question 27

Traders that react based on new information about firms that are revealed to the stock market. They are more adept in guessing or getting new information about firms and they can make predict how the market will react based on this.

Answer 27

Information Traders

Question 28

issue valuation judgment that are contained in research reports that are disseminated widely to current and potential clients.

Answer 28

Sell-side analysts

Question 29

look at specific investment options and make valuation analysis on these and report to a portfolio manager or investment committee. They tend to perform more in-depth analysis of a firm and engage in more rigorous stock selection methodologies.

Answer 29

Buy-side Analysts

Question 30

usually has two parties: the buying firm and the selling firm. The buying firm needs to determine the fair value of the target company prior to offerlng a bid price. on, the other hand, the selling firm (or' sometrmes, the target company) should have a sense of its firm value to gauge reasonableness of bid offers.

Answer 30

Acquisition

Question 31

General term which describes the transaction Wherein two companies had their assets combined to form a wholly new entity.

Answer 31

Merger

Question 32

Sale of a major component or segment of a business (e.g. brand or product line) to another company.

Answer 32

Divestiture

Question 33

Separating a segment or component business and transforming this into a Separate legal entity.

Answer 33

Spin-Off

Question 34

Acquisition of another business by using significant debt which uses the acquired business as a collateral.

Answer 34

Leverage Buyout

Question 35

potential increase in firm value that can be generated once two firms merge with each other. It assumes combined value of two firms will be greater than the sum of separate firms.

Answer 35

Synergy

Question 36

change in people managing the organization brought about by the acquisition. Any impact to firm value resulting from the change in management and restructuring of the target company should be included in the valuation exercise. This is usually an important matter for hostile takeovers.

Answer 36

Control

Question 37

involves managing the firm's capital structure, including funding sources and strategies that the business should pursue to maximize firm value. It deals with prioritizing and distributing financial resources to activities that increases firm value. The ultimate goal is to maximize the firm value by appropriate planning and implementation of resources, while balancing profitability and risk appetite.

Answer 37

Corporate finance

Question 38

includes performing industry and competitive analysis and analysis of publicly available financial information and corporate disclosures. This is very important as these give analysts and investors the idea about the following factors: economic conditions, industry peculiarities, company strategy and company’s historical performance. This phase enables analysts to come up with appropriate assumptions which reasonably capture the business realities affecting the firm and its value.

Answer 38

Understanding of the business

Question 39

refers to the inherent technical and economic characteristics of an industry and the trends that may affect this structure.

Answer 39

Industry Structure

Question 40

Refers to the nature and intensity of rivalry between market players in the industry.

Answer 40

Industry Rivalry

Question 41

Refers to the barriers to entry to industry by new market players.

Answer 41

New Entrants

Question 42

This refers to the relationships between interrelated products and services in the industry.

Answer 42

Substitutes and Complements

Question 43

refers to how suppliers can negotiate better terms in their favor.

Answer 43

Supplier power

Question 44

pertains to how customers can negotiate better terms in their favor for the products/services they purchase.

Answer 44

Buyer Power

Question 45

can be looked at two lenses: (a) on a macro perspective viewing the economic environment and industry where the firm operates in and (b) on a micro perspective focusing in the firm's financial and operating characteristics.

Answer 45

Forecasting financial performance

Question 46

Forecast starts from international or national macroeconomic projections with utmost consideration to industry specific forecasts. From here, analysts select which are relevant to the firm and then applies this to the firm and asset forecast. the most common variables include GDP forecast, consumption forecasts, inflation projections, foreign exchange currency rates, industry sales and market share. A result of this approach is the forecasted sales volume of the company. Revenue forecast will be built from this combined with the company-set sales prices.

Answer 46

Top-down forecasting approach

Question 47

Forecast starts from the lower levels of the firm and is completed as it captures what will happen to the company based on the inputs of its segments / units.

Answer 47

Bottom-up forecasting approach

Question 48

should also consider industry financial ratios as this gives an idea how the industry is operating.

Answer 48

Forecasting Process

Question 49

The appropriate valuation model will depend on the context of the valuation and the inherent characteristics of the company being valued.

Answer 49

Selecting the right valuation model

Question 50

Once the valuation model is decided, the forecasts should now be inputted and converted to the chosen valuation model. This step is not only about manually encoding the forecast to the model to estimate the value (which is the job of Microsoft Excel). More so, analysts should consider whether the resulting value from this process makes sense based on their knowledge about the business.

Answer 50

Preparing valuation model based on forecasts

Question 51

is a common methodology in valuation Wherein multiple analyses are done to understand how changes in an input or variable will affect the outcome .(i.e. firm value).

Answer 51

Sensitivity Analysis

Question 52

For firm-specific issues that affect firm value that should be adjusted by analysts.This includes control premium, absence of marketability discounts and illiquidity discounts.

Answer 52

Situational adjustments or Scenario Modelling

Question 53

Once the value is calculated based on all assumptions considered, the analysts and investors use the results to provide recommendations or make decisions that suits their investment objective.

Answer 53

Applying valuation conclusions and providing recommendation

Question 54

Key Principles in Valuation

Answer 54

1. The value of a business is defined only at a specific point in time. 2. Value varies based on the ability of business to generate future cash flows 3. Market dictates the appropriate rate of return for investors. 4. Firm value can be impacted by underlying net tangible assets. 5. Value is influenced by transferability of future cash flows. 6. Value is impacted by liquidity

Question 55

Business value tend to change every day as transactions happen - Different circumstances that occur on a daily basis affect earnings, cash position, and working capital and market conditions.

Answer 55

The Value of a Business is Defined Only at a specific point in time

Question 56

General concepts for most valuation techniques put emphasis on future cash flows except for some circumstances where value can be better derived from asset liquidation.

Answer 56

Value varies based on the ability of business to generate future cash flows

Question 57

Market forces are constantly changing, and they normally provide guidance of what rate of return should investors expect from different investment vehicles in the market. Interaction of market forces may differ based on type of industry and general economic conditions. Understanding the rate of return dictated by the market is important for investors so they can capture the right discount rate to be used for valuation. This can influence their decision to buy or sell investments.

Answer 57

Market dictates the appropriate rate of return for investors

Question 58

Business valuation principles look at the relationship between operational value of an entity and net tangible of its assets. Theoretically, firms with higher underlying net tangible asset value are more stable and results in higher going concern value. - This is the result of presence of more assets that can be used as security during financing acquisitions or even liquidation proceedings in case bankruptcy occurs. Presence of sufficient net tangible assets can also support the forecasts on future operating plans of the business.

Answer 58

Firm value can be impacted by underlying net tangible assets

Question 59

Transferability of future cash flows is also important especially to potential acquirers. - Business with good value can operate even without owner intervention. If a firm's survival depends on owner's influence (e.g. owner maintains customer relationship or provides certain services), this value might not be transferred to the buyer, hence, this will reduce firm value. In such cases, value will only be limited to net tangible assets that can be transferred to the buyer.

Answer 59

Value is influenced by transferability of future cash flows

Question 60

This principle is mainly dictated by the theory of demand and supply. If there are many potential buyers with less acquisition targets. value of the target firms may rise since the buyers will express more interest to buy the business. Sellers should be able to attract and negotiate potential purchases to maximize value they can realize from the transaction.

Answer 60

Value is impacted by liquidity