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39 Cards in this Set
- Front
- Back
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Most simply, what is the value of a company?
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Value of assets = Debt +Equity
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Without an equation what is the value of a company?
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The value of a company is equal to the value of its assets
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How do you calculate the value of debt in a company?
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The value of debt is easy to calculate; the market value of debt is equal to the book value of the debt.
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In what situation would the book value of debt be different than the market value of debt?
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This will occur when debt is traded on the market, this is when it has real "market value"
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What are the four most common techniques for equity valuation?
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1. DCF Analysis
2. Multiples Method 3. Market Valuation 4. Comparable Transaction Method |
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What is the language to which valuation is based on?
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Accounting
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What are annual reports sometimes referred as?
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10K's
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How do you find the net worth of a company?
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The equity section of the balance sheet presents the net worth of the company (Assets-Liabilities)
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How can you define a loss?
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There's a cash outflow and it does not help generate revenue for the company
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Why are expenses required?
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Expenses are required to generate revenue.
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On the statement of cash flows, how would you define entries to operating activities?
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Cash flow from operating activities include cash effects of transaction involved in calculating net income.
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On the statement of cash flows, how would you define operating activities?
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Cash flow from investing activities include activities dealing with asset accounts on the balance sheet, in other words, asset permanent accounts. This includes the purchase and sale of equipment and investments.
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On the statement of cash flows, how would define financing activities?
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Cash flow from financing activities involves activities from the liabilities and equity accounts on the balance sheet, in other words, Liabilities and Equity permanent accounts.
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What is a useful technique when determining if an activity is an operating, investing, and financing?
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Make an accounting entry for it. Are you debiting or crediting cash (?), are you dealing with a nominal or permanent account (?), what balance sheet classification is it? Liability, Asset or Equity account?
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You buy equipment with a note, does it go to the statement of cash flow?
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No! only activities that involve an immediate outflow or inflow of cash are put on the statement of cash flows
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What is the simplest way to value a publicly traded firm?
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Market Valuation, which is the market capitalization of the firm.
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What are the 10Q's?
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Quarterly Financials
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Where can you find 10Q's?
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SEC Edgar Database
http://www.edgar-online.com |
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What are 10K's?
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Annual Financials
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What is the most thorough way to value a company?
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DCF Analysis?
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What are the two ways to value a company using the DCF approach?
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1. Adjusted Present Value (APV) Method
2. Weighted Average Cost of Capital (WACC) Method |
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What do WACC and APV measure?
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The calculation of a company's free cash flow (FCF) and the net present value (NPV) of the FCF's.
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List 2 reasons why a dollar today is worth more than it is tomorrow?
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1. Lost opportunity to invest in a risk free assessment.
2. Inflation |
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Is the discount rate the opportunity cost rate of other projects forgone?
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1. Lost opportunity to invest in a risk free asset.
2. Inflation |
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What is the formula for PV?
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PV= FV / (1+R)^N
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What is the discount rate dependent on?
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The rate is dependent on the
1. APV method 2. WACC method |
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What must you use to find an appropriate discount rate?
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CAPM: Capital Asset Pricing Model
(CAPM is also the expected return on equity) |
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Explain what happens with a Beta of .5 and the market moves 20% up?
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The specific company stock will move up 5%.
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Mathematically how is CAPM calculated?
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Re=Rf + B (Rm-Rf)
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What must you consider when determining the risk free rate to use in your CAPM calculation
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The treasury bill rate for the period over which the cash projections are being considered. (Remember we are using this rate in our DCF analysis, for our valuation of the company). For example, if we are considering a 10 year period, then the risk free rate is the rate for the 10 year US Treasury Note. I'm assuming this means if you want to value a company over a 10 year period.
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What percentage is the excess market return usually assumed to be ?
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7%
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How do you determine the Beta of a Private Company?
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You need to find a firm w/ a similar balance sheet and income statement that is publicly traded.
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What do you use assets Beta or equity Beta?
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You of course want to use equity Beta. A
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What is Assets Beta?
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Assets Beta is also known as unlevered Beta.This compares the the risk of an unlevered company to the risk of the market. The unlevered Beta is the Beta of a company without any debt.
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How is Beta determined?
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Remember that Beta measures the volatility or systematic risk of a security (or portfolio) It is calculated using REGRESSION ANALYSIS, and you can think of Beta as the tendency of a security's returns to repond to swings in the market
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What is Regression Analysis?
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The analysis of numerical data, involving a dependent variable (aka response variable or measurement) and its relation to an independent variable (aka explanatory variables or predictors).
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What is the long formula for assets Beta
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(Equity Beta)(E/D+E) + (1-T)(Debt Beta)(D/D+E)
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What can you consider Debt Beta to be?
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ZERO, because there is no volatility because debt is normally not traded on the market.
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What is the formula for calculating Debt Beta?
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Assets Beta (D+E/E)
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