VALUATION METHOD - SEMI-FINAL Flashcards
(65 cards)
1
Q
1997 Nobel Prize (Black-Scholes Option Pricing Model)
A
- Robert Merton
- Myron Scholes
- Fischer Black
2
Q
Common Techniques:
- derived from Black and Scholes’ insights
A
- Black-Scholes Option Pricing Model
- Binomial Option Pricing Model
- Risk-Neutral Probabilities
- Risk and Return of an Option
- Corporate Applications of Option Pricing
3
Q
- gives holder the right (but not the obligation) to purchase an asset at
some future date.
A
Call Option
4
Q
gives the holder the right to sell an asset at some future date.
A
Put Option
5
Q
- the price at which the holder agrees to buy or sell the share of stock when the option is exercised.
A
Strike Price or Exercise Price
6
Q
- the last date on which the holder has the right to exercise the option.
A
Expiration Date
7
Q
can be exercised on any date up to, and including the exercise date.
A
American Option
8
Q
- can be exercised only on the expiration date.
A
European Option
9
Q
- it can be derived from the Binomial Option Pricing Model by making the length of each period, and the movement of the stock price per period, shrink to zero and letting the number of periods grow infinitely large.
A
Black-Scholes Option Pricing Model
10
Q
5 Input Parameters to Price the Call
A
- Stock Price
- Strike Price
- Exercise Date
- Risk-free Rate
- Volatility of the Stock
11
Q
- an option can be valued using a portfolio that replicates the payoffs
of the option in different states.
A
Binomial Option Pricing Model
12
Q
it assumes two possible states for the next time period, given today’s
state.
A
Binomial Option Pricing Model
13
Q
the value of an option is the value of the portfolio that replicates its
payoffs. The replicating portfolio will hold the underlying asset and
risk-free debt, and will need to be rebalanced over time.
A
Binomial Option Pricing Model
14
Q
- a portfolio of other securities that has exactly the same value in
one period as the option.
A
Two-State Single-Period Model
15
Q
- there are more than two possible outcomes for the stock price in
the real world.
A
Multiperiod Model
16
Q
- also known as state-contingent prices, state prices, or martingale
prices. - probabilities under which the expected return of all securities equals
the risk-free rate.
A
Risk-Neutral Probabilities
17
Q
- these probabilities can be used to price any other
asset for which the payoffs in each state are known.
A
Risk-Neutral Probabilities
18
Q
- in a binomial tree, the _____________ p that the stock price
will increase is given by
A
Risk-Neutral Probabilities
19
Q
any security whose payoff depends solely on the prices of other
marketed assets.
A
Derivative Security
20
Q
the basis for a common technique for pricing derivative securities
called Monte Carlo simulation.
A
Risk-Neutral Pricing Method
21
Q
In the randomization, the ______________ are used, and so the average payoff can be discounted at the risk-free rate to estimate the derivative security’s value.
A
risk-neutral probabilities
22
Q
the beta of an option can also be calculated by computing the beta of
its replicating portfolio.
A
Risk and Return of an Option
23
Q
as the stock price changes, the beta of an option will change, with its
magnitude falling as the option goes in-the-money.
A
Risk and Return of an Option
24
Q
for stocks with positive betas, calls will have larger betas than the
underlying stock, while puts will have negative betas. The magnitude of the option beta is higher for options that are further out of the money.
A
Risk and Return of an Option
25
expected returns and beta are linearly related.
Risk and Return of an Option
26
Two corporate applications of option pricing:
* unlevering the beta of equity & calculating the beta of risky debt.
* deriving the approximation formula to value debt overhang.
27
- is an analysis technique that works on the basis of what-if analysis like how independent factors can affect the dependent factor and is used to predict the outcome when analysis is performed under certain
conditions.
Sensitivity Analysis
28
- is the simplest method of sensitivity analysis.
- it involves changing one factor at a time and observing how it
affects the outcome.
One-way Analysis
29
is a variation of one-way analysis that allows you to change two
factors at the same time and observe how they affect the outcome.
Two-way Analysis
30
is a method of sensitivity analysis that involves creating different
scenarios based on different combinations of factors and
assumptions.
Scenario Analysis
31
is a method of sensitivity analysis that uses random sampling and
simulation to generate many possible outcomes based on the inputs and their probability distributions.
Monte Carlo Analysis
32
- is derivative based (numerical or analytical). The term local
indicates that the derivatives are taken at a single point.
Local Sensitivity Analysis
33
- this method is for simple cost functions, but not feasible for
complex models.
Local Sensitivity Analysis
34
- is the second approach to sensitivity analysis, often
implemented using Monte Carlo techniques.
Global Sensitivity Analysis
35
- this approach uses a global set of samples to explore the design
space.
Global Sensitivity Analysis
36
- sensitivity analysis helps in understanding which variables or
factors have the most impact on the outcome or results.
Identifies Key Drivers
36
sensitivity analysis helps in assessing the level of risk and
uncertainty associated with the project or decision.
Evaluates Risk and Uncertainty
37
- sensitivity analysis aids in developing robust plans by considering multiple scenarios and variations, ensuring that plans can adapt to different possible outcomes.
Supports Effective Planning
38
sensitivity analysis relies on assumptions that may not accurately represent the real-world complexity and dynamics, potentially leading
to biased or incomplete results.
Assumption limitations
39
sensitivity analysis requires reliable data, and if the data is
insufficient or of poor quality, the analysis may produce unreliable or
misleading outcomes
Data requirements
39
conducting sensitivity analysis can be time-consuming and
resource-intensive, especially with complex models or numerous
variables.
Time-consuming
40
- is one of the tools that help decision makers with more than a solution to a problem. It provides an appropriate insight into the problems associated with the model under reference. Finally, the decision maker gets a decent idea about how sensitive is the optimum solution chosen by him to any change in the input values of one or more parameters.
Sensitivity Analysis
41
also known as a company valuation, is the process of determining the economic value of a business.
Business Valuation
42
During the valuation process, all areas of a business are analyzed to determine its worth and the worth of its departments or units.
Business Valuation
43
is typically conducted when a company is looking to sell all or a portion of its operations or looking to merge with or acquire another company.
business valuation
44
is frequently discussed in corporate finance.
business valuation
45
might include an analysis of the company's management, its capital structure, its future earnings prospects or the market value of its assets. The tools used for valuation can vary among evaluators, businesses, and industries.
business valuation
46
is the simplest method of business valuation. It is calculated by multiplying the company’s share price by its total number of shares outstanding.
Market Capitalization
47
a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment.
Times Revenue Method
48
may be used to get a more accurate picture of the real value of a company, since a company’s profits are a more reliable indicator of its financial success than sales revenue is.
Earnings Multiplier
49
this method is based on projections of future cash flows, which are adjusted to get the current market value of the company.
Discounted Cash Flow (DCF) Method
49
the DCF method of business valuation is similar to the earnings multiplier.
Discounted Cash Flow (DCF) Method
50
this is the value of shareholders’ equity of a business as shown on the balance sheet statement.
Book Value
51
is derived by subtracting the total liabilities of a company from its total assets.
Book Value
52
is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today.
Liquidation Value
53
is a professional designation awarded to accountants such as CPAs who specialize in calculating the value of businesses.
Accredited in Business Valuation (ABV)
54
commonly referred to as the market value of equity or market capitalization, can be defined as the total value of the company that is attributable to equity investors.
Equity Value
54
is overseen by the American Institute of Certified Public Accountants (AICPA) and requires candidates to complete an application process, pass an exam, meet minimum Business Experience and Education requirements, Association of International Certified Professional Accountants.
ABV certification
55
it is calculated by multiplying a company’s share price by its number of shares outstanding.
Equity Value
56
is simply the difference between a company’s assets and liabilities.
book value or shareholders’ equity
57
is not the same as its book value. It is calculated by multiplying a company’s share price by its number of shares outstanding,
equity value of a company
58
Basic Equity Value is simply calculated by multiplying a company’s share price by the number of basic shares outstanding. The calculation of basic shares outstanding does not include the effect of dilution that may occur due to dilutive securities such as stock options, restricted and performance stock units, preferred stock, warrants, and convertible debt.
Basic Equity Value vs Diluted Equity Value
59
it is very important to understand the difference between equity value and enterprise value as these are two very important concepts that nearly always come up in finance interviews. To calculate enterprise value from equity value, subtract cash and cash equivalents and add debt, preferred stock, and minority interest.
Equity Value vs. Enterprise Value
60
both equity value and enterprise value are used to value companies, with the exception of a few industries such as banking and insurance, where only equity value is used. An important thing to understand is when to use equity value and when to use enterprise value. It depends on the metric that is being used to value a company.
Multiples Valuation: Equity Value vs. Enterprise Value
61
when calculating equity value, levered free cash flows (cash flow available to equity shareholders) are discounted by the cost of equity, the reason being, the calculation is only concerned with what is left for equity investors.
Discount Rate: Equity Value vs. Enterprise Value
