Valuation principles and practices Flashcards Preview

Financial Risk Management 212 > Valuation principles and practices > Flashcards

Flashcards in Valuation principles and practices Deck (19)
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1
Q

Valuation

A

Refers to the process of finding the fair-value of an asset. Also called the intrinsic or estimated value of an asset

2
Q

Par value / Face Value

A

Refers to the arbitrarily assigned value of an financial asset

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

3
Q

Market value

A

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

4
Q

Market value added

A

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

5
Q

Market capitalization

A

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

6
Q

Book value for fixed assets

A

Cost minus accumulated depreciation

7
Q

Book value for equities

A

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

8
Q

Fair (intrinsic) value

A

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

9
Q

Inputs required for a cashflow model

A
  • Cash Flows
  • Timings of cash flows
  • Discount rate / required rate of return
  • In some equity models a growth rate
10
Q

Bonds (vanilla bond)

A
  • 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
11
Q

Yield to maturity

A

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

12
Q

Required return vs coupon rate

A

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

13
Q

Preference share

A

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

14
Q

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

Assumptions of the model

A
  • 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
15
Q

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

A
  • 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
16
Q

Two-stage dividend discount model

A

Makes provision for two stages of growth

  • An initial phase of extraordinary growth
  • A subsequent steady state of no growth or stable growth
17
Q

Limitations of the two-stage DDM

A
  • 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
18
Q

Where is the two-stage DDM suited

A

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

19
Q

Price-earnings ratio

A

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