Introduction to asset valuation

Question 1

what are the types of value

Answer 1

1. Going concern value = value of assets working together

2. Liquidation Value = sum of each asset

Question 2

If conditions are same which is better liquidation or going concern

Answer 2

Going concern because they can have synergys

Question 3

What is valuation

Answer 3

the estimation of the asset value (intrinsic value) based either on variables (absolute valuation methods) perceived to be related to future investment returns or on comparisons with similar assets (relative valuation methods)

Question 4

comment on the statement

A valuation is an objective search for intrinsic value

Answer 4

all valuations are bias

Question 5

comment on the statement

a good valuation provides a precise estimate of value

Answer 5

false

Question 6

How can you select a valuation model

Answer 6

1. Characteristics of the company being valued
2. Availability and quality of the data
3. Purpose of valuation

Question 7

how does selection of valuation model change when the characteristics of the company being valued

Answer 7

if a company has no similar comparable assets. Can we use a relative valuation model?

Question 8

how does selection of valuation model change when the availability and quality of data changes

Answer 8

1. a company has never paid dividends and no other information exists to assess its future dividend policy
2. a company has highly volatile or persistently negative earnings. Can we use P/E

Question 9

how does selection of valuation model change when the purpose of the valuation changes

Answer 9

1. an investor is seeking a controlling equity position in a company DCF or DDM? DCF
2. An investor would like to hold for a single period DCF or P/E? P/E

Question 10

What is an absolute valuation model

Answer 10

an estimate of an assets intrinsic value that can be compared with its market price
e.g DCF

Question 11

What information is needed for DCF

Answer 11

1. life of the asset
2. cashflow
3. discount rate

Question 12

What is a relative valuation model

Answer 12

an assets multiples compared with another similar asset Ie market price of A and market price of B

Question 13

What multiples are there

Answer 13

1. Earnings multiple
2. Book value (of equity)
3. sales
4. cashflow

Question 14

earnings multiple formula

Answer 14

Price/earnings

Question 15

Book value multiple formula

Answer 15

Price/book value

Question 16

Sales multiples formula

Answer 16

price/sales

Question 17

cashflow multiples formula

Answer 17

price/ cashflow

Question 18

what is the philosophy of relative valuation mdoel

Answer 18

similar assets should sell at similar prices

Question 19

What information do you need for RVM

Answer 19

1. an identical asset
2. standardised measure of value
3. and if the variables are not perfectly comparable, variables to control for the differences

Question 20

Is DCF absolute or relative

Answer 20

Absolute

Question 21

Is multiples absolute or relative

Answer 21

relative

Question 22

DCF vs multiples

exposed to the market perceptions and moods

Answer 22

DCF less

Multiples more but take advantage of market perception and moods ie want to sell a security at that price today

Question 23

DCF vs multiples

help to understand the business

Answer 23

DCF helpful

multiples less helpful

Question 24

DCF vs multiples

Inputs required

Answer 24

DCF more but inputs can be manipulated by the analyst to provide the conclusion he or she wants
Multiples less, but require more information when controlling for differences

Question 25

DCF vs multiples | selecting a portfolio with some stocks undervalued and some overvalued

Answer 25

DCF difficult | Multiples easy, but difficult to find similar assets and similar assets might be mispricing

Question 26

demirakos et al 2004 | what does it show

Answer 26

earnings multiples are most popular

Question 27

glaum and friedreich 2006 | what does it show

Answer 27

popularity of DCF becoming more popular since 1990s

Question 28

Arnold and Mozier 1984 | what does it show

Answer 28

PE ratio is most popular method of valuation

Question 29

what is the valuations process

Answer 29

1. Understand the business - copr strat anal 2. FS anal 3. Performance forecast 4. selecting an appropriate valuation model 5. Converting forecasts to a valuation 6. Make investment decision MAKE SURE TO TALK ABOUT PROFIT

Question 30

How can you understand the business/ analyse

Answer 30

ANALYSE environment, industry and corporate strategy | Analyse profits

Question 31

What frameworks can you use to understand the business

Answer 31

PEST - national/global porter five forces - industry SWOT - firm

Question 32

what techniques are there for FS anal

Answer 32

1. Common size anal 2. trend anal 3. ratio anal 4. segmental anal 5. multivariate anal

Question 33

what are techniques for performance forecasts

Answer 33

use historical data to predict performance. | EPS

Question 34

How can you select a valuation model

Answer 34

1 Characteristics of the company being valued 2. availability and quality of data 3. purpose of valuation MUST BE ABLE TO DISCUSS THESE POINTS

Question 35

Converting forecasts to a valuations techniques

Answer 35

1. Sensitivity analysis - discount rates, growth rate forecasts 2. Situational adjustments - control premium, lack of marketebility, illiquidity discount (have snesitivity analysis and maybe situational adjustments section in diss)