Podcast
Questions and Answers
What is the primary purpose of valuation?
What is the primary purpose of valuation?
- To determine the fair price of a security (correct)
- To compare companies' revenues only
- To calculate the number of assets owned
- To ensure a company always makes profit
Relative valuation models focus solely on a company's intrinsic value.
Relative valuation models focus solely on a company's intrinsic value.
False (B)
What is one primary method used in Absolute Valuation Models?
What is one primary method used in Absolute Valuation Models?
Discounted Cash Flow (DCF) Valuation
The principle that uses the original cost of an asset as its value is called __________.
The principle that uses the original cost of an asset as its value is called __________.
Match the valuation principles with their descriptions:
Match the valuation principles with their descriptions:
Which factor is NOT mentioned as influencing valuation?
Which factor is NOT mentioned as influencing valuation?
Assets that are more liquid tend to be worth less.
Assets that are more liquid tend to be worth less.
What does DCF stand for in valuation methods?
What does DCF stand for in valuation methods?
A principle that focuses on the price agreed upon by both the seller and buyer is called __________.
A principle that focuses on the price agreed upon by both the seller and buyer is called __________.
Which of the following statements best describes Present Value principle?
Which of the following statements best describes Present Value principle?
Flashcards
Market Valuation
Market Valuation
The process of determining the fair market value of a company or asset.
Absolute Valuation
Absolute Valuation
Estimating intrinsic value based on the company's fundamentals (e.g., cash flow).
Relative Valuation
Relative Valuation
Comparing a company to similar companies using financial ratios and multiples.
DCF Valuation
DCF Valuation
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Historical Cost
Historical Cost
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Current Value
Current Value
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Realizable Value
Realizable Value
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Present Value
Present Value
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Liquidity
Liquidity
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Minority Interest
Minority Interest
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Study Notes
Market Valuation Principles
- Market valuation determines fair market value of companies or assets.
- Valuation is vital for determining if a company/asset is overvalued or undervalued.
Valuation Methods
- Absolute Valuation: Focuses on a company's intrinsic value based on fundamentals like cash flow and growth rate (no comparison to others).
- Relative Valuation: Compares companies using multiples and ratios (e.g., price-to-earnings).
Valuation Methods Explained
- Discounted Cash Flow (DCF): Projects future cash flows, discounts them to present value using a discount rate (reflecting risk/return). Useful for assets with predictable future cash flow (e.g., real estate, machinery).
Valuation Principles
- Historical Cost: Assets' value is the original cost, regardless of time.
- Current Value: Assets' value is the current market price, assuming specifications match.
- Realizable Value: Agreed-upon price between buyer and seller, with no strict terms.
- Present Value: Estimates future asset price, discounted to current value.
Factors Influencing Valuation
- Liquidity: Easily bought/sold assets are more valuable.
- Minority Interest: Minority shareholders receive a discount due to reduced control.
- Market Fluctuations: Market prices change, requiring awareness of risk.
Avoiding Valuation Pitfalls
- Don't rely solely on one method. Use multiple methods.
- Consider overall market conditions.
- Use accurate data (avoid using outdated information).
- Tailor valuation to a company's particular characteristics.
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