Flashcards in Valuation principles and practices Deck (19)

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1

## Valuation

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

2

## 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

3

## Market value

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

4

## Market value added

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

5

## Market capitalization

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

6

## Book value for fixed assets

### Cost minus accumulated depreciation

7

## 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

8

## Fair (intrinsic) value

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

9

## 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

10

## 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

11

## 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

12

## 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

13

## Preference share

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

14

##
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

15

## 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

16

## 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

17

## 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

18

## Where is the two-stage DDM suited

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

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