Valuation Terms Questions and Answers

Valuation Terms Questions and Answers 3 main approaches to valuation Intrinsic, relative, asset-based What's a LBO? a group of investors (typically private equity firm) purchases a company and finances the transaction primarily with debt. When is asset-based valuation used a company liquidating a bankruptcy filing Most popular model for intrinsic valuation Discounted Cash Flow (DCF) Why is relative Valuation popular? Easy What do you estimate the value of a firm using DCF analysis Magnitude, timing, and risk Fairness Opinion A letter from an independent valuation expert stating that the price being paid in an acquisition is fair. Porter's 5 Forces *Rivalry among competitors; *Threat of new entrants; *Threat of substitute products; * power of buyers; * power of suppliers; Porter's 3 Generic Strategies 1. cost leadership 2. differentiation 3. focus According to Porter, strategy is fundamentally about positioning SWOT stands for.... strengths, weaknesses, opportunities, threats what does low barrier to entry mean highly competitive market reduced barrier to entry does what increases competition and profit potential what do profitability ratios do compares performance between firms and over time if you calculate sales revenue and gross margin, then you can also find... cost of goods sold If you want to compare two companies that differ in size, what should you use rate of return? what are some drawbacks of using EPS to compare a firm's performance? *doesn't consider the amount of assets/capital *It's affected by the firm's finances like debt *It's affected by share repurchases *It's often the target of manipulation by management If EPS have so many drawbacks why do we use it? affects stock price, values a firm, standard calculation on the income statement, tells you overall profit share T/F: EPS is more important to valuation and less important when comparing two companies True what does rate of return tell you a company's profit relative to their amount of investment ROIC uses what book value of debt and equity Why would someone use NOPAT instead of net income when calculating the (ROIC)? nopat isn't impacted by interest expense a company creates value when... ROIC(rate on invested capital) WACC (weighted average cost of capital) there is often a tradeoff between what profit margin and asset turnover accounting numbers in the financial statements are a function of: actual economic info, measurement error, bias a high-quality balance sheet can assess risk what makes a balance sheet quality low? -unrecorded/understated assets and liabilities, misclassified liabilities what suggests accounting fraud a very large difference between net income and operating cash flow what do companies often misclassify current liabilities as long-term ones CFO's describe high quality earnings as backed by future cash flows channel stuffing causes Overstated revenues How does management alter a business decision to meet a quarterly earnings per target - delaying maintenance on equipment - timing the sale of an asset to book an unrealized gain Which of the following predicts accounting fraud beneish M-score Management Guidance When a company's management forecasts financial statements to make predictions Which statement starts a full financial model Income Statement Top down approach When you forecast the overall market and then forecast the company's share to forecast sales revenue. when a company's market gets more competitive, what will happen to teslas market decrease prices what is forecasted based on its historical relationship to sales SG&A How to forecast nonrecurring items forecast them to zero total sales is a function of what: Price/volume to forecast earnings per share you need: net income, weighted-avrg of common shares, preferred dividends Which balance sheet account would likely forecast to have no change: goodwill WACC is used for which valuation model Discounted cash flow model that uses unlevered cash flows To know whether a company is creating value for its common shareholders, you compare what ROCE to Cost of Equity Beta is the measure of what the market risk of stock Market risk risk that affects all companies in the stock market If beta is 2.4, how much is the stock expected to increase 24% high beta implies... higher risk market premium The difference between the return of the market portfolio and the risk-free rate of return what valuation models focus on playoffs Dividends-based cash-flow-based earnings-based where can you find historical information on dividends statement of stockholders' equity residual income model a method for valuing stock in a company that does not pay dividends, uses beginning book value of common equity When gains/losses bypass net income___ comprenhesive income___ Dirty surplus Clean surplus Which model is used to estimate the per-share value discounted cash flow with unlevered free cash flow what is unaffected by an increase in interest unlevered free cash flow