Prelim Exam Reviewer Flashcards
(97 cards)
1
Q
pertains to the worth of an object in another person’s point of view
A
Value
2
Q
it 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, an estimates of immediate liquidation proceeds.
A
Valuation
3
Q
“A company creates value if and only if the return on capital invested exceed the cost of acquiring capital”
A
Marshall’s Principle on Creating Value
4
Q
3 Major Factors That Can Be Linked to The Value of Business
A
- Current operations
- Future prospects
- Embedded risk
5
Q
How is the operating performance of the firm in recent year?
A
Current operations
6
Q
what is the long term, strategic direction of the company?
A
Future prospects
7
Q
what are the business risks involved in running the business?
A
Embedded risk
8
Q
the value that’s an investor considers on the basis of an evaluation of available facts, to be the “true” or “real” value.
A
Intrinsic value
9
Q
the price of an asset when buyer and seller have reasonable knowledge of it and are willing to trade without pressure
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Fair market value
10
Q
the net value of a company’s physical assets if it were to go out of business and the assets sold
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Liquidation value
11
Q
the value of a company under the assumption that it will continue to operate for the foreseeable future.
A
Going-concern value
12
Q
the process of making strategic decisions about how to invest and manage a collection of assets or investments, known as a portfolio, to achieve specific financial goals while balancing risk and return
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Portfolio management
13
Q
For fundamental analysts, the true
value of firm can be estimated by
looking at its financial characteristics,
its growth prospects, cash flows and
risk profile.
A
Fundamental analyst
14
Q
tend to look for companies with good
growth prospects that have poor
management.
A
Activist investors
15
Q
usually do “takeovers”
A
Activist investors
16
Q
relies on the concept that stock prices
are significantly influenced by how
investors think and act
A
Chartists
17
Q
correlate value and how information will affect this value.
A
Information traders
18
Q
Under Portfolio Management, The Following Activities Can Be Performed Through the Use of Valuation Techniques
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Stock selection
Deducing market expectations
19
Q
is a particular asset fairly priced,
overpriced, underpriced in relation to
its prevailing computed intrinsic value
and prices of comparable assets
A
Stock selection
20
Q
which estimates of a firm’s future
performance are in line with the
prevailing market price of its stocks?
Are there assumptions about
fundamentals that will justify the
prevailing price?
A
Deducing market expectations
21
Q
general term which describes the
transaction wherein two companies had their assets combined to form a wholly new entity.
A
Merger
22
Q
sale of a major component or
segment of a business to another company
A
Divestiture
23
Q
separating a segment or component
business and transforming this into a separate legal entity
A
Spin-off
24
Q
Acquisition of another business by
using significant debt which uses the acquired business as a collateral.
A
Buyout
25
Valuation in deals analysis consider two important, unique factors
Synergy
Control
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potential increase in firm value that
can be generated once two firms merge with each other
Synergy
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change in people managing the
organization brought about by the acquisition
Control
28
small private businesses that need
additional money to expand use
valuation concepts when approaching
private equity investors and venture
capital providers to show the promise
of the business
Corporate finance
29
Large companies who wish to obtain
additional funds by offering their
shares to the public also need valuation to estimate the price they are going to fetch in the stock market
Corporate finance
30
ensures that financial outcomes and corporate strategy drives maximum of firm value
Corporate finance
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if a new partner will join a
partnership or an old partner will retire, the
whole partnership should be valued to identify
how much should be the buy-in or sell-out
Legal and tax purpose
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Issuance of a fairness opinion for
valuations provided by third party
Other purpose
33
Basis for assessment of potential
lending activities by financial
institutions
Other purpose
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Share-based payment / compensation
Other purpose
35
5 STEPS VALUATION PROCESS
Understanding of the business
Forecasting financial performance
Selecting the right valuation model
Preparing valuation model based kn forecasts
Applying valuation conclusions and preparing recommendation
36
includes performing industry and
competitive analysis and analysis of
publicly available financial
information and corporate disclosures
Understanding of the business
37
refers to the
inherent technical and economic
characteristics of an industry and the
trends that may affect this structure
Industry structure
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means that these are true to most, if not all, market player participating in that industry
Industry characteristics
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Porter’s 5 forces model
Rivalry among existing competitors
Threat of new entrants
Threat of substitutes
Bargaining power of buyers
Bargaining power of suppliers
40
Porter’s generic strategies
Cost leadership
Differentiation
Focus
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pertains to the method how
the company makes money - what are the
products or services they offer how they deliver
and provide these to customers and their target
customers
Business model
42
Typical sources of information
1. government-mandated disclosures like
audited financial statements
2. regulatory filings, company press releases
and financial statements
3. news articles
4. reports from industry organization
5. reports from regulatory agencies
6. industry researches done by independent
firms
43
FORECASTING FINANCIAL
PERFORMANCE
Can be looked at two lenses
Macro perspective
Micro perspective
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forecast starts from international or national
macroeconomic projections with utmost
consideration to industry-specific forecasts
Top-down forecasting approach
45
common variables include GDP forecast,
consumption forecasts, inflation projections,
foreign exchange currency rates, industry sale
and market share.
Top-down forecasting approach
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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
segment/units.
Bottom-up forecasting approach
47
The appropriation valuation model will
depend on the
context of the valuation
inherent characteristics of the company being
valued
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once the valuation model is decided, the
forecasts should now be inputted and converted
to the chosen valuation model.
Preparing valuation model based on forecasts
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assumptions that are commonly used are sales
growth, gross margin rates and discount rates.
Aside from these, other variables (like market
share, advertising expense, discounts,
differentiated feature, etc)
Sensitivity analysis
50
These factors that do not affect value per share
when analysts only look at core business
operations but will still influence value
regardless. This includes control premium,
absence of marketability discount and
illiquidity discounts.
Situational adjustments or scenario modeling
51
SIX KEY PRINCIPLES IN VALUATION
The valuation of a business is defined only at a specific point in time.
Value varies based on the ability of
business to generate future cash flows
Market dictates the appropriate rate
return for investor
Firm value can be impacted by underlying net tangible assets.
Value is influenced by transferability of
future cash flows
Value is impacted by liquidity
52
Refers to the possible range of values where the real firm value lies.
Uncertainty
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is captured in valuation models through cost of capital or discount rate.
Uncertainty
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as transactions that would yield future
economic benefits as a result of past
transactions.
Assets
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is highly dependent on the value that the assets will generate from now until the future
Value of investment opportunities
56
a sensitive and
confidential activity in the portfolio
management.
Valuation
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value shall be based on pure estimates
and these are investments that started
from scratch
Green field investment
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investments are already in the going
concern state
• considered as Going concern Business
Opportunities (GCBOs).
Brown field investment
59
Advantage of brownfield investment:
already have a reference for their
performance-from its historical performance or
an existing business with similar nature.
60
suggests
that risk management principles must be
observed in doing businesses and determining
its value.
The Committee of Sponsoring Organization of the Treadway Commission (COSO)
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is dependent on the economic
benefits. (i.e., cash flows) it gives.
Asset value
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Advantage and disadvantage of asset value
Advantage: It enables the analyst to validate
the firm value through the value of its assets.
Disadvantage: that it only focuses on the
current and historical value of the assets and
will disregard the value it can generate in the
future and may not fully represent the true
value of the assets
63
value recorded in the accounting
records of a company. It is highly
dependent on the value of the assets as declared in the audited financial
statements.
Book value method
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expected to be realized within the
company’s normal operating cycle.
• realized within 12 months after these
transactions were reported, or held
primarily for the purpose of trading
Current assets
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are the assets wherein benefits can be
realized in more than 12 months
• Benefits can be realized in more than
12 months
Non current assets
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are expected to be settled within the
entity’s normal operating cycle
• settled within 12 months, held for the
purpose of trading or if the company
does not have ability to settle beyond
12 months.
Current liabilities
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due to be settled longer than 12
months
No current liabilities
68
True or false:
The Value of the enterprise is based on the book value of the assets less all non-equity claims against it.
True
69
Pros and cons of bv method
Advantage: of using book value method is that
It provides a more transparent view on firm
value and is more verifiable since this is based
in the figures reflected in the financial
statements.
Disadvantage: Book value only reflects
historical value and might not reflect the real
value of the business now. It does not account
for the full value of the net assets now that would
result for overage or understatement of value of
the net assets recorded in the book
70
the cost of similar assets that have the nearest equivalent value as of the valuation date. Under The replacement value method, the value of the individual assets shall be adjusted to reflect the relative value or cost equivalent to replace the asset.
Replacement cost - National Association of Valuators and
Analysts
71
This will enable the valuator to
determine the costs related in order to
upkeep similarly aged assets and
whether assets with similar engineering design are still available in the market.
Age of the asset
72
This is important for fixed assets
particularly real property where assets
of the similar size will be compared.
Size of the assets
73
Assets which have distinct
characteristics are hard to replace.
Some valuators combine the value of
the similar, separate assets that can
perform the function of the distinct
asset being valued.
Competitive advantage of the assets
74
The basis for replacement cost of assets that are highly specialized in nature. In this case, reproduction value is used instead.
Reproduction value method
75
is an estimate of cost of producing,
creating, developing, or manufacturing
a similar asset.
• This method requires reproduction cost analysis
Reproduction value method
76
is an equity valuation approach that considers the salvage value as the value of the asset.
Advantage: It provides is the most
conservative value.
Disadvantage: The future value is not fully incorporated in the calculated equity value.
Liquidation value method
77
is a company’s calculation of the
minimum return that would be necessary in order
to justify undertaking a capital budgeting project.
Cost of capital
78
represents the cost a company incurs when it borrows money through
loans or by issuing bonds. This cost is essentially the interest rate the company pays to its
creditors (lenders or bondholders) for using their money.
cost of debt
79
represents the return that shareholders (owners) of a company expect
for investing their money in the business. It is the return required by equity investors to
compensate them for the risk associated with owning shares in the company.
cost of equity
80
is a tool to calculate the overall cost of financing by
considering both debt and equit
Weighted Average Cost of Capital (WACC)
81
Measures a company’s cost to borrow money given the
proportional amounts of each type of debt and equity a
company has taken on.
WACC
82
10% return, 8% WACC - creates value
10% return, 15% WACC - destroys value
10% return, 10% WACC - stagnant value
Ohaha HAHAHHA
83
It refers to the overall health and performance of the economy at a
given period of time. They determine the demand and supply of
capital within the economy, as well as the level of expected
inflation.
General economic conditions
84
the level of interest rates set by the central banks
directly affects the cost of capital.
Interest rates
85
Inflation erodes the purchasing power of money
progressively.
Inflation rates
86
A strong economy with robust growth can lead to higher demand
for capital, which possibly drives up the cost of capital as businesses compete for
funds
Economic growth
87
Economic downturns can lead to risk aversion, possibly
increasing the cost of capital as investors demand for higher returns to
compensate for perceived risks
Market Segment
88
also determine the demand and supply of capital, as well as
investor sentiment and overall market volatility
Market Conditions
89
Market conditions determine the
availability of capital. Where there is a high demand for
funds, the cost of capital may rise due to the increased
competitions between lenders.
Demand and Supply -
90
this can also influence the cost of
capital in a way optimistic sentiment can lead to higher stock
prices and lower expected returns, possibly reducing the cost
of capital.
Investor Sentiment
91
Periods of high market volatility can
increase the perceived risk associated with investments
Market Volatility
92
this is determined by financing decision
that involves the mix of debt and equity used to fund its
operations.
Capital Structure
93
can affect the company’s probability
and cash flows.
Operating Efficiency
94
this is a part of financing decisions. A more
generous dividend policy may attract certain investors but can also
increase the cost of equity capital, as shareholders expect higher
returns.
Dividend Policy
95
the risk and return profile of these
investments can influence the cost of capital in a way where
high-risk projects may require a higher expected return.
Investment Choices
96
the total amount of financing a company requires for its
operations, projects, or expansion plans.
Scale of Financing
97
the amount of financing sought can affect the perceived risk of the
investment
Risk and Return
