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Flashcards in Valuation principles and practices Deck (19)
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Refers to the process of finding the fair-value of an asset. Also called the intrinsic or estimated value of an asset


Par value / Face Value

Refers to the arbitrarily assigned value of an financial asset

The value at which an financial asset is originally issued in the primary market


Market value

Determined by what buyers are prepared to offers and what sellers are willing to accept in the secondary markets


Market value added

The amount by which the ordinary shares of a firm have increased in market value a certain period


Market capitalization

The number of shares which have been issued by a firm multiplied by the market value per share


Book value for fixed assets

Cost minus accumulated depreciation


Book value for equities

Par value per share times the number of shares issued, plus cumulative retained earnings, plus capital contributed in excess of par


Fair (intrinsic) value

The value of an asset is the present value of all future cashflows the asset is expected to generate


Inputs required for a cashflow model

- Cash Flows

- Timings of cash flows

- Discount rate / required rate of return

- In some equity models a growth rate


Bonds (vanilla bond)

- Long term debt financing

- Enable companies to borrow money from a diverse group of lenders for periods (maturities) ranging from 10 to 20 years

- Normally interest is paid semi-annually

- Normally the principal is only paid at the end of the term


Yield to maturity

Refers to the rate of return investors earn if they buy a bond at a specific price and hold it till maturity

YTM of bond with current value equal to its par value will be equal to its coupon rate


Required return vs coupon rate

if required return > coupon rate, then bond value will be less than its par value

if required return < coupon rate, then bond value will be greater than its par value

if required return == coupon rate, then bond value will be equal to its par value


Preference share

In its simplest form a preference share pays a coupon for a unlimited period of time


Limitations of the constant growth / Gordon growth / Dividend discount model

Assumptions of the model

- Relevant only to firms growing at a constant rate

- As the growth rate converges with the discount rate, the value goes to infinity

- If the growth rate is greater than the required rate of return then the share value cannot be determined


The constant growth / Gordon growth / Dividend discount model is appropriate for a firm with the following features:

- Stable earnings growth rate at or below nominal growth rate in the economy

- Well established dividend payout policy that is likely to continue in the future

- A payout ratio consistent with with the assumption of stability

- Stable leverage and beta


Two-stage dividend discount model

Makes provision for two stages of growth
- An initial phase of extraordinary growth
- A subsequent steady state of no growth or stable growth


Limitations of the two-stage DDM

- Defining the length of the high growth period is problematic
- Unrealistic growth assumptions are made
- The value estimate is highly sensitive to assumptions about the stable growth rate


Where is the two-stage DDM suited

Companies with high growth, but where the sources of growth are expected to disappear


Price-earnings ratio

Indicates the Rand amount an investor can expect to invest in a company in order to receive one Rand of that company's earnings