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Lecture 7- Valuation methods
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1Standard valuation techniques include: [blank_start]book value[blank_end], [blank_start]dividend growth model[blank_end], [blank_start]earnings multiple[blank_end] & [blank_start]discounted cash flow[blank_end]
- Abook value
- Bdividend growth model
- Cearnings multiple
- Ddiscounted cash flow
2Book value assumes [blank_start]firm[blank_end] value is equal to [blank_start]book[blank_end] value of [blank_start]assets[blank_end]. It's [blank_start]widely[blank_end] used & accepted method due to certification by [blank_start]accountants[blank_end], while also being perhaps most [blank_start]flawed[blank_end]
- Afirm
- Bbook
- Cassets
- Dwidely
- Eaccountants
- Fflawed
3One advantage of using book value as valuation method is it’s [blank_start]easy method[blank_end] to use
- Aeasy method
4One disadvantage of using book value as valuation method is it's based on [blank_start]historic numbers[blank_end], ignores [blank_start]future[blank_end]
- Ahistoric numbers
- Bfuture
5Another disadvantage of using book value as valuation method is it's based on [blank_start]accounting numbers[blank_end] that are potentially [blank_start]flawed[blank_end] & subject to [blank_start]manipulation[blank_end]
- Aaccounting numbers
- Bflawed
- Cmanipulation
6Third disadvantage of using book value as valuation method is it [blank_start]ignores risk[blank_end]
- Aignores risk
7Fourth disadvantage of using book value as valuation method is it ignores [blank_start]intangibles[blank_end] which are difficult to [blank_start]measure[blank_end] & therefore not all [blank_start]included[blank_end] in balance sheet
- Aintangibles
- Bmeasure
- Cincluded
8Dividend growth model assumes [blank_start]equity[blank_end] value is equal to [blank_start]present[blank_end] value of [blank_start]dividend payments[blank_end]
- Aequity
- Bpresent
- Cdividend payments
9One advantage of using dividend growth model as valuation method is it’s [blank_start]simple method[blank_end] to apply, especially if [blank_start]constant dividend growth[blank_end] model is assumed
- Asimple method
- Bconstant dividend growth
10One disadvantage of using dividend growth model as valuation method is [blank_start]dividends[blank_end] are based on [blank_start]accounting calculations[blank_end]
- Adividends
- Baccounting calculations
11Another disadvantage of using dividend growth model as valuation method is it assumes [blank_start]dividends[blank_end] grow at [blank_start]constant rate[blank_end] which may not [blank_start]always[blank_end] be case
- Adividends
- Bconstant rate
- Calways
12Third disadvantage of using dividend growth model as valuation method is it does not [blank_start]work[blank_end] for companies that do not [blank_start]pay dividends[blank_end]
- Awork
- Bpay dividends
13Multiples method is very [blank_start]common method[blank_end] for valuing [blank_start]assets[blank_end]. It uses [blank_start]multiples[blank_end] from another [blank_start]comparable[blank_end] company (or average of group of companies) in [blank_start]conjunction[blank_end] with an [blank_start]earnings[blank_end] measure (or other return measures) of company for which [blank_start]value[blank_end] calculation is required
- Acommon method
- Bassets
- Cmultiples
- Dcomparable
- Econjunction
- Fearnings
- Gvalue
14One advantage of using multiples method as valuation method is it’s [blank_start]easy method[blank_end] to use
- Aeasy method
15Another advantage of using multiples method as valuation method is it makes [blank_start]intuitive sense[blank_end]
- Aintuitive sense
16Third advantage of using multiples method as valuation method is if [blank_start]comparables[blank_end] are really [blank_start]comparable[blank_end] then it would work
- Acomparables
- Bcomparable
17One disadvantage of using multiples method as valuation method is [blank_start]earnings[blank_end] used in most methods are [blank_start]accounting figures[blank_end]
- Aearnings
- Baccounting figures
18Another disadvantage of using multiples method as valuation method is [blank_start]earnings[blank_end] are subject to [blank_start]short-term fluctuations[blank_end]
- Aearnings
- Bshort-term fluctuations
19Third disadvantage of using multiples method as valuation method is it often ignores [blank_start]growth potential[blank_end]
- Agrowth potential
20One widely used multiple is [blank_start]price-to-earnings[blank_end]. It is calculated as [blank_start]market price per share[blank_end] divided by [blank_start]earnings per share[blank_end]
- Aprice-to-earnings
- Bmarket price per share
- Cearnings per share
21Another widely used multiple is [blank_start]total asset value-to-EBIT[blank_end]. It is calculated as [blank_start]total asset value[blank_end] divided by [blank_start]EBIT[blank_end]
- Atotal asset value-to-EBIT
- Btotal asset value
- CEBIT
22Third widely used multiple is [blank_start]market value[blank_end] of [blank_start]company[blank_end] to [blank_start]EBIT[blank_end]. It is calculated as [blank_start]market value of company[blank_end] divided by [blank_start]EBIT[blank_end]
- Amarket value
- Bcompany
- CEBIT
- Dmarket value of company
- EEBIT
23Fourth widely used multiple is [blank_start]price-to-sales[blank_end]. It is calculated as [blank_start]current stock price[blank_end] divided by [blank_start]annual revenue per share[blank_end]
- Aprice-to-sales
- Bcurrent stock price
- Cannual revenue per share
24Fifth widely used multiple is [blank_start]price-to-book value[blank_end]. It is calculated as [blank_start]market value per share[blank_end] divided by [blank_start]book value per share of equity[blank_end]
- Aprice-to-book value
- Bmarket value per share
- Cbook value per share of equity
25First step of discounted cash flow valuation is forecast [blank_start]free cash flows[blank_end] up to some [blank_start]terminal date[blank_end]. Second step is to estimate [blank_start]terminal value[blank_end] (i.e. continuing [blank_start]value[blank_end]) which equals value after [blank_start]terminal date[blank_end]. Third step is to estimate [blank_start]cost of capital[blank_end] (i.e. [blank_start]discount[blank_end] rate). Fourth step is to [blank_start]discount[blank_end] to [blank_start]present[blank_end]
- Afree cash flows
- Bterminal date
- Cterminal value
- Dvalue
- Eterminal date
- Fcost of capital
- Gdiscount
- Hdiscount
- Ipresent
26EBITDA = [blank_start]Revenue - Operating expenses[blank_end]
- ARevenue - Operating expenses
27EBIT = [blank_start]EBITDA - Depreciation & amortisation[blank_end]
- AEBITDA - Depreciation & amortisation
28EBT = [blank_start]EBIT - Interest expenses[blank_end]
- AEBIT - Interest expenses
29Net income or net earnings = [blank_start]EBT - Taxes[blank_end]
- AEBT - Taxes
30CFO or OCF = [blank_start]Net income + Depreciation & amortisation[blank_end]
- ANet income + Depreciation & amortisation
31Free cash flow to firm (FCFF)- Cash flow to [blank_start]common shareholders[blank_end], [blank_start]preferred shareholders[blank_end] & debtholders. If FCFF is used that belongs to both shareholders & bondholders use [blank_start]WACC[blank_end] as discount rate. Discounting FCFF at cost of equity will yield [blank_start]downward[blank_end] biased estimate of [blank_start]value[blank_end] of firm
- Acommon shareholders
- Bpreferred shareholders
- CWACC
- Ddownward
- Evalue
32Free cash flow to equity (FCFE)- FCFE is used that belong to shareholders use cost of equity only which can be [blank_start]measured[blank_end] using [blank_start]dividend[blank_end] model, [blank_start]risk & return[blank_end] model (such as [blank_start]capital asset pricing[blank_end] model & [blank_start]arbitrage pricing[blank_end] theory) & [blank_start]industry average[blank_end] model. Discounting FCFE using WACC will lead to an [blank_start]upwardly[blank_end] biased estimate of [blank_start]value[blank_end] of equity
- Ameasured
- Bdividend
- Crisk & return
- Dcapital asset pricing
- Earbitrage pricing
- Findustry average
- Gupwardly
- Hvalue
33When estimating firm’s terminal value, assume [blank_start]free cash flows[blank_end] grow at [blank_start]constant rate[blank_end] after [blank_start]forecast horizon[blank_end]
- Afree cash flows
- Bconstant rate
- Cforecast horizon
34Ways of estimating earnings growth are: to look at [blank_start]past[blank_end] ([blank_start]historical[blank_end] growth in [blank_start]earnings per share[blank_end] is typical starting point), to look at what [blank_start]others[blank_end] are [blank_start]projecting[blank_end] (other [blank_start]analysts[blank_end] may be using [blank_start]information[blank_end] you do not have & it is often useful to know what their [blank_start]estimates[blank_end] are) & to look at [blank_start]fundamentals[blank_end] (how much are they [blank_start]investing[blank_end]? what is [blank_start]return[blank_end] on their [blank_start]investment[blank_end]?)
- Apast
- Bhistorical
- Cearnings per share
- Dothers
- Eprojecting
- Fanalysts
- Ginformation
- Hestimates
- Ifundamentals
- Jinvesting
- Kreturn
- Linvestment
35One advantage of using discounted cash flows as valuation method is it should be [blank_start]less exposed[blank_end] to market moods & perceptions if done [blank_start]right[blank_end] by being based upon an [blank_start]asset’s fundamentals[blank_end]
- Aless exposed
- Bright
- Casset’s fundamentals
36Another advantage of using discounted cash flows as valuation method is if investors buy [blank_start]businesses[blank_end], rather than [blank_start]stocks[blank_end], DCF valuation is [blank_start]right[blank_end] way to think about what you are getting when you buy an [blank_start]asset[blank_end]
- Abusinesses
- Bstocks
- Cright
- Dasset
37Third advantage of using discounted cash flows as valuation method is DCF valuation forces you to think about [blank_start]underlying characteristics[blank_end] of firm & understand its [blank_start]business[blank_end]. It helps you [blank_start]question assumptions[blank_end] you have made
- Aunderlying characteristics
- Bbusiness
- Cquestion assumptions
38One disadvantage of using discounted cash flows as valuation method is it requires far more [blank_start]inputs[blank_end] & [blank_start]information[blank_end] than other valuation approaches as it attempts to [blank_start]estimate intrinsic value[blank_end] (perceived or calculated value)
- Ainputs
- Binformation
- Cestimate intrinsic value
39Another disadvantage of using discounted cash flows as valuation method is [blank_start]inputs[blank_end] & [blank_start]information[blank_end] are difficult to [blank_start]estimate[blank_end] & can be [blank_start]manipulated[blank_end] by analyst to provide [blank_start]conclusion[blank_end] he or she wants
- Ainputs
- Binformation
- Cestimate
- Dmanipulated
- Econclusion
40DCF valuation is easiest to use for assets (firms) whose cashflows are [blank_start]currently positive[blank_end], can be [blank_start]estimated[blank_end] with some [blank_start]reliability[blank_end] for [blank_start]future[blank_end] periods & where proxy for [blank_start]risk[blank_end] that can be used to obtain [blank_start]discount rates[blank_end] is available
- Acurrently positive
- Bestimated
- Creliability
- Dfuture
- Erisk
- Fdiscount rates
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- User has deleted their subject information Quiz on Lecture 7- Valuation methods, created by Deleted user on 12/07/2021.
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- Created on 12 Jul 2021 · updated on 12 Jul 2021
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