CHAPTER 1 - TRUE OR FALSE
Cards (39)
- Value pertains to how much a particular object is worth to a particular set of eyes.
- Methods to value for real estate can may be different on how to value an entire business
- Businesses treat capital as a scarce resource that they should compete to obtain and efficiently manage.
- According to the CFA Institute, valuation 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.
- Valuation includes the use of forecasts to come up with reasonable estimate of value of an entity's assets or its equity.
- Valuation techiniques may differ across different assets, but all follows similar fundamental principles that drives the core of these approaches.
- As valuation mostly deals with projections about future events, analysts should hone their ability to balance and evaluation different assumptions used in each phase of the valuation exercise, assess validity of available empirical evidence and come up with rational choices that aligns with the ultimate objective of the valuation activity.
- In the corporate setting, the fundamental equation of value is grounded on the principle that Alfred Marshall popularized a company creates value if and only if the return on capital invested exceed the cost of acquiring capital.
- Value, in the point of view of corporate shareholders, relates to the difference between cash inflows generated by an investment and the cost associated with the capital invested which captures both time value of money and risk premium.
- Intrinsic value refers to the value of any asset based on the assumption assuming there is a hypothetically complete understanding of its investment characteristics.
- Going Concern firm value is determined under the going concern assumption. The going concern assumption believes that the entity will continue to do its business activities into the foreseeable future.
- Liquidation Value is the net amount that would be realized if the business is terminated and the assets are sold piecemeal.
- Fair Market Value is 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.
- Fundamental analysts are persons who are interested in understanding and measuring the intrinsic value of a firm.
- Fundamentals refer to the characteristics of an entity related to its financial strength, profitability or risk appetite.
- Activities investors usually do "takeovers" - they use their equity holdings to push old management out of the company and change the way the company is being run.
- Chartists relies on the concept that stock prices are significantly influenced by how investors think and act. Chartists rely on available trading KPIs such as price movements, trading volume, short sales - when making their investment decisions.
- Information Traders are Traders that react based on new information about firms that are revealed to the stock market. The underlying belief is that information traders are more adept in guessing or getting new information about firms and they can make predict how the market will react based on this.
- An acquisition 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 offering a bid price.
- Merger is the general term which describes the transaction two companies have their assets combined to form a wholly new entity.
- Divestiture is the sale of a major component or segment of a business (e.g. brand or product line) to another company.
- Spin-off is separating a segment or component business and transforming this into a separate legal entity whose ownership will be transferred to shareholders.
- Leveraged buyout is the acquisition of another business by using significant debt which uses the acquired business as a collateral.
- Synergy can be attributable to more efficient operations, cost reductions, increased revenues, combined products/markets or cross-disciplinary talents of the combined organization.
- Corporate finance mainly involves managing the firm's capital structure, including funding sources and strategies that the business should pursue to maximize firm value.
- Valuation is also important to businesses because of legal and tax purposes.
- Top-down forecasting approach - Forecast starts from international or national macroeconomic projectionswith utmost consideration to industry specific forecasts
- Top-down forecasting approach - Forecast starts from international or national macroeconomic projections.
- Sensitivity analysis is the common methodology in valuation exercises wherein multiple other analyses are done to understand how changes in an input or variable will affect the outcome (i.e. firm value).
- Uncertainty is captured in valuation models through cost of capital or discount rate.
- Valuation 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.
- Definition of value may vary depending on the context. Different definitions of value include intrinsic value, going concern value, liquidation value and fair market value.
- Valuation plays significant role in the business world with respect to portfolio management, business transactions or deals, corporate finance, legal and tax purposes.
- Generally, valuation process involves these five steps: understanding of the business, forecasting financial performance, selecting right valuation model, preparing valuation model based on forecasts and applying conclusions and providing recommendations.
- Value is defined at a specific point in time.
- Value varies based on ability of business to generate future cash flows.
- Market dictates appropriate rate of return for investors.
- Value is influenced by transferability of future cash flows.
- Value is impact by liquidity.