CHAPTER 1

Charles Jaojao · 26問 · 1年前

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Pertains to the worth of an object in another person’s point of view.

value

Businesses treat ___ as a scarce resource that they should compete to obtain and efficiently manage.

capital

The most fundamental principle for all investments and business is to

maximize shareholder value

Growing companies provide long-term sustainability to the economy by yielding:

1. higher economic output 2. better productivity gains 3. employment growth 4. higher salaries

The fundamental point behind success in investments is understanding what is the___ and the____

prevailing value key drivers that influence this value

According to CFA institute. ______ is the estimation of an asset’s value based on variables perceived to be related to future invesment returns, on comparisons with similar assets, or , when relevant, on estimates of immediate liquidation proceeds

valuation

Valuation includes the use of

forecasts

May differ across different assets but follow similar fundamental principles that drive the core of these approaches

valuation techniques

He said a company creates value if and only if the return on capital invested exceed the cost of acquiring capital.

Alfred Marshall

Business can be basically linked to three major factors

1. current operations 2. future prospects 3. embedded risks

How is the operating performance of the firm on recent year?

current operation

What is the long-term, strategic direction of the company?

future prospects

What are the business risks involved in running the business?

embedded risk

Make the business environment more dynamic

1. quick turn over of technologies 2. rapid globalization

Also harder because of constant changes in the economic environment and the continuos innovation of market players.

projecting future macroeconomic indicators

Also surface which makes determining uncertainties a critical ingredient to success

new risks and competition

Valuation based on purpose

1. intrinsic value 2. going concern value 3. liquidation value 4. fair market value

Refers to the value of asset based on the assumption that there is hypothetical complete understanding of its investment characteristics.

intrinsic value

Is the value that an investor considers on the basis of an evaluation of available facts to be true or real value that will become the market value when other investors reach the same conclusion.

intrinsic value

States that if the market prices, which can obtained freely, perfectly reflect the intrinsic value of an asset, then a rational investor will not spend to gather data to validate the value of a stock.

The Grossman-Stiglits paradox

Often try to look for stock which are mispriced in the market and base their buy or sell recommendation based on these analysis.

securities analysts

Is highly relevant in valuing public shares.

intrinsic value

Should be able to come up with accurate forecasts and determine the right valuation model that will yield a good estimate of a firm’s intrinsic value.

financial analysts

Is determine under the going concern assumption.

firm value

Believes that the entity will continue to do its business activities into the foreseeable future.

Going concern assumption

The net amount that would be realized if the business is terminated and the assets are sold piecemeal.

liquidation value

Is particularly relevant for companies who are experiencing severe financial loss.

liquidation value

The price, expressed in terms of cash, at which property would change hands between a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell.

Fair market value

Assumes that both parties are informed of all material characteristics about the invesment that might influence their decision.

fair value

Is often use in valuation excercises involving tax assessment.

fair value

Roles of Valuation in business (4)

1. portfolio management 2. business transaction analysis 3. corporate finance 4. legal and tax purpose

Tends to be disinterested in understanding valuation.

passive investors

May want to understand valuation in order to participate intelligently in the stock market.

active investors

Types of Investors (4) (CAFI)

1. Chartists 2. activists investors 3. fundamental analysts 4. information traders

These are persons who are interested in understanding and measuring the intrinsic value of a firm.

fundamental analysts

Refer to the characteristics of an entity related to its financial strength, profitability or risk appetite.

fundamentals

For fundamental analysts, the true value of a firm can be estimated by looking at its (4) (FGCR)

Financial characteristics growth prospects cash flows risk profile

Typically, fundamental analysts lean towards long-term investment strategies which encapsulate the following principles: (3) (RAA)

1. Relationship between value and underlying factors can be reliably measure 2. the relationship is stable over an extended period 3. any deviation of the relationship can be corrected within a reasonable time

Fundamental analysts can be either:

Value or growth investors

Tend to be mostly interested in purchasing shares that are existing and priced at less than their true value.

value investors

Lean towards growth assets (business that might not be profitable now but has high expected value in future years) and purchasing these at a discount

Growth investors

Use valuation techniques to support the buy/sell recommendations that they provide to their clients.

Security and Investment analysts

Tend to look for companies with good growth prospects that have poor management.

Activist investors

Usually they do “takeovers”- they use their equity holdings to push old management out of the company and change the way the company is run.

activist investors

Relies on the concept that stock prices are significantly influenced by how investors think and act.

Chartists

Rely in available trading KPIs such as price movements, trading volume, and short sales when making their invesment decisions.

Chartists

Are more adept in guessing or getting new information about firms and they can make predict how the market React based on these.

Information traders

Correlate value and how information will affect this value

information traders

Under portfolio management, the following activities can be performed through the use of valuation techniques.

Stock selection understanding market expectation

This answers the question “is a particular asset fairly priced, mispriced, overpriced, or underpriced in relation to its prevailing computed intrinsic value and prices of comparable assets”

stock selection

This answer the question “which estimates of a firm’s future performance are in line with the prevailing market price of its stocks? Are there assumptions about fundamentals that will justify the prevailing price?”

Understanding market expectation

Issue valuation judgement that are contained in research reports that are disseminated widely to current and potential clients.

Sell-side analysts

Look at specific investment options and make valuation analysis on these report to a portfolio manager or invesment committee.

buy-side analysts

Tend to perform more in-depth analysis of a firm and engage in more rigorous stock selection methodologies.

buy-side analysts

In general, ______ assist clients to realize their investment goals by providing them information that will help make the right decision whether to buy or sell. They also play significant role in the financial markets by providing the right information to investors which enable the latter to buy or sell shares.

finacial analysts

Use relevant valuation techniques (whichever is applicable) to estimate value of target firms they are planning to purchase and understand the synergies they take advantage from the purchase.

potential acquirers

Business deals include the following corporate events: (5)

1. Acquisition 2. Merger 3. Divestiture 4. spinoff 5. leveraged buyout

Usually has two parties: the buying firm and the selling firm.

acquisition

Needs to determine the fair value of the target company prior to offering a bid price.

buying firm

Sometimes, the target company should have a sense of its firm value to gauge reasonableness of bid offers.

selling firm

General term which describes the transaction wherein two companies had their assets combined to form a wholly new entity.

merger

Sale of a major component ir segment of a business (eg. brand or product line) to another company.

divestiture

Separating a segment or component business and transforming this into a separate legal entity.

spin-off

Acquisition of another business by using significant debt which uses the acquired business as a colateral.

leveraged buyout

Valuation in deals analysis considers two important, unique factor:

1. synergy 2. control

Potential increase in firm value that can be generated once two firms merge with each other.

synergy

Assumes that the combined value of two firms will be greater than the sum if separate firms.

synergy

Can be attributable to more efficient operations, cost reductions, increased revenues, combined products/markets or cross-disciplinary talents of the combined organization.

synergy

Change in people managing the organization brought about by the acquisition.

control

Involves managing the firm’s capital structure, including funding resources and strategies that the business should pursue to maximize firm value.

corporate finance

Deals with prioritizing and distributing financial resources to activities that increases firm value.

corporate finance

The ultimate goal of corporate finance is to?

maximize firm value

Ensures that financial outcomes and corporate strategy drives maximazation of firm value.

corporate finance

New/retiring partner Dissolution/liquidation Estate tax

legal and tax purpose

Steps in Valuation process: (UFSPA)

1. Understanding the business and environment 2. Forecast 3. Select 4. prepare 5. Apply

Performing industry and competitive analysis and analysis of publicly available financial information corporate disclosures.

Understanding the business

Understanding the business is very important as these give analysts and investors the idea about the following factors:

1. Economic factors 2. industry pecularities 3. company strategy 4. company’s historical performance

Enables analysts to come up with appropriate assumptions which reasonably capture the business realities affecting the firm and its value:

understanding phase

Refers to the inherent technical and economic characteristics of an industry and the trends that may affect this structure.

Industry Structure

Porter’s Five Forces: (BINSS)

1. Buyer Power 2. Industry Rivalry 3. New entrants 4. Substitutes and Complements 5. Supplier Power

Refers to the nature and intensity of rivalry between market players in the industry.

Industry Rivalry

This considers concentration of market players, degree of differentiation, switching costs, information and government restraint.

Industry rivalry

Refers to the barriers to entry to industry by new market players

new entrants

This include entry cost, speed of adjustment, economies of scale, reputation, switching costs, sunk costs and government restraint.

new entrants

This refers to the relationships between interrelated products and services in the industry.

substitute and complements

This consider prices of substitute products/services, compliment product/services and government limitations.

substitute and complements

Refers to how suppliers can negotiaten better terms in their favor.

supplier power

This considers supplier concentration, prices of alternative inputs, relationship-specific investments, supplier switching costs and governmental regulations.

supplier power

Pertains to how customers can negotiate better terms in their favor for the product/services they purchase.

Buyer power

This include buyer concentration, value of substitute products that buyers can purchase, customer switching costs and government restraints.

buyer power

Refers to how products, services and the company itself is set apart from other competiting market players

competitive position

Is typically gauged using prevailing market share level that the company enjoys.

competitive position

According to him there are generic corporate strategies to achieve competitive advantage:

Michael Porter

(3) Competitive advantages

1. cost leadership 2. Differentiation 3. Focus

It relates to the incurrence of the lowest cost among market players with quality that is comparable to competitors allow the firm to price products around the industry average.

cost leadership

Firms tend to offer differentiated or unique profuct or service characteristics that customers are willing to pay for an additional premium.

Differentiation

Firms are identifying specific demographic segment or category segment to focus on by using cost leadership strategy (cost focus) or differentiation strategy (differentiation focus)

focus

Pertains to the method how the company makes money- what are products or services they offer.

business model

Analysis of historical financial reports typically use

horizontal, vertical, ratio analysis

100

Some information can also be compared against stated objectives of the organization such as

1. sales growth 2. gross margin ratios 3. profit target

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