Board logo

标题: Equity Valuation【 Reading 34】Sample [打印本页]
作者: bapswarrior    时间: 2012-3-30 15:42     标题: [2012 L2] Equity Valuation【Session 10- Reading 34】Sample

How can we account for different valuations for the same firm from several analysts even if they use the same required returns?
A)
Valuations are based on the analyst's expectations.
B)
The analysts may be biased with personal opinions about management.
C)
Valuation models contain random errors.


Valuation is based on expectations of future cash flows rather than known values. Each analyst will build expectations of cash flows from the fundamental data and from other factors, internal and external, that the analyst believes will affect the firm’s performance.
作者: bapswarrior    时间: 2012-3-30 15:42

Valuation models for equities contain estimates of required returns and:
A)
an assumed continuation of past cash flows.
B)
expected future cash flows.
C)
known future cash flows.


Valuation models used for equities require the analyst to estimate the required return applicable to the investment and to develop an expectation of future cash flows. While cash flows for fixed-income investments are stated, no such definition is available for equities.
作者: bapswarrior    时间: 2012-3-30 15:43

The goal of asset valuation, based on the expected future cash flows of an asset, is to establish an asset’s:
A)
relative value.
B)
intrinsic value.
C)
market value.


Asset valuation based on the expected future cash flows is utilized to estimate an asset’s intrinsic value, or the value derived from the asset's investment characteristics.
作者: bapswarrior    时间: 2012-3-30 15:43

A wise analyst will examine a valuation to determine:
A)
ways to enhance a client's valuation.
B)
its sensitivity to changes in expectations.
C)
how well it will be received by the firm's management.


The results of valuation models can be very sensitive to changes in the expectations incorporated in the model. Analysis of a valuation’s sensitivity to the expectations and a review of the confidence the analyst has in the expectations may lead to the use of a valuation range rather than a pin-point value.
作者: bapswarrior    时间: 2012-3-30 15:44

A valuation of a firm based on the current market price of its assets - liabilities is referred to as the firm’s:
A)
going-concern value.
B)
liquidation value.
C)
operating value.


The liquidation value is based on the assumption that the firm will cease to operate and all of its assets will be sold to repay liabilities.
作者: bapswarrior    时间: 2012-3-30 15:44

Liquidation value is the:
A)
market value of the total assets less the market value of the total liabilities.
B)
cash generated by terminating a business, selling its assets, and repaying liabilities.
C)
present value of future cash flow less the possible liquidation cost.


Liquidation value is the cash generated by terminating a business, selling all of its assets, and repaying liabilities.
作者: bapswarrior    时间: 2012-3-30 15:44

A comparison between a firm’s going-concern valuation and its liquidation value will show that the going-concern value will always be:
A)
equal to the present value of the expected continued operation of the firm.
B)
greater than the liquidation value.
C)
less than the liquidation value.


It is not possible to state the relationship between the going-concern value and the liquidation value without examining the prospects for the firm and the current value of the assets. The going-concern value is equal to the present value of the expected dividends arising from continued operation
作者: bapswarrior    时间: 2012-3-30 15:46

A valuation of a firm based on the assumption that the firm will continue to operate is referred to as its:
A)
operating value.
B)
status quo value.
C)
going-concern value.


The going-concern value is based on the assumption that the firm will continue to operate and the firm’s value is the present value of its future dividends
作者: bapswarrior    时间: 2012-3-30 15:46

The present value of expected future cash flows is the firm's:
A)
going-concern value.
B)
terminal value.
C)
liquidation value.


Going-concern value is the present worth of expected future cash flows generated by a business.
作者: bapswarrior    时间: 2012-3-30 15:46

Which of the following is NOT a use of asset valuation?
A)
Estimating inflation rates.
B)
Projecting the value of corporate actions.
C)
Issuing fairness opinions.


Asset valuation has many uses including stock selection, reading the market, projecting the value of corporate actions, issuing fairness opinions, and valuing private businesses. Asset valuation is not used to project inflation rates.
作者: bapswarrior    时间: 2012-3-30 15:46

Minority shareholders often do not have control of the price at which the firm will be sold or merged with another firm. In order to safeguard their interests, minority shareholders will often seek an analyst’s opinion of the value of the firm. This opinion is referred to as a:
A)
second opinion.
B)
minority opinion.
C)
fairness opinion.


Minority shareholders are often dependent upon an analyst's opinion about the fairness of a price to be received. Hence the term fairness opinion
作者: bapswarrior    时间: 2012-3-30 15:47

An analyst performing an asset valuation to detect investor’s expectations about the future value of the variables that affect a stock’s price is most likely using the valuation for:
A)
generating a fairness opinion.
B)
reading the market.
C)
projecting the value of corporate actions.


Asset valuation has many uses including stock selection, reading the market, projecting the value of corporate actions, issuing fairness opinions, and valuing private businesses. Reading the market entails detecting investor’s expectations about the future value of the variables that affect a stock’s price.
作者: bapswarrior    时间: 2012-3-30 15:48

Joe Dentice has an opportunity to buy 5% of Gold Star Oil, Inc., a closely held oil company. He wants to value the company so as to be able to make a decision on the fair price to pay for the investment. List the steps in the top down valuation approach as it is applicable for Gold Star investment. Forecast the growth of:
A)
Gold Star, the growth of each firm in the industry, and then the growth of the oil industry.
B)
each firm in the oil industry, the growth rate of the oil industry, and the growth rate of the economy.
C)
the overall economy, growth of the industry, and the growth rate of Gold Star.


The top down model for valuation would begin with analysis of the overall economy and the expectation of the growth rate in the economy. Further, the impact of the expected growth rate of the economy on the oil industry needs to be ascertained. The second component is the analysis of the oil industry in which Gold Star operates. That involves the determination of the competitive forces in the industry and the future threats and opportunities faced by the industry. It also determines the variables that determine the future profitability of the entire oil industry. The analyst then forms future expectations of these variables given the expectations about the overall economy. The expectations of variables determining the growth and profitability of the oil industry are then used to determine the expectations of the overall growth of Gold Star. In the company analysis, the analyst reviews the quality of earnings, financial ratios, management and intangibles to ascertain the growth prospects for the company. The analyst then selects an appropriate model to value the company. Assumptions used in the valuation must be clearly spelled out and updated to reflect new information.
Which of the following models would be most suitable to value Gold Star?
A)
Absolute valuation.
B)
Relative valuation.
C)
Liquidation value.


Absolute valuation models or intrinsic value models such as the dividend growth rate model and the free cash flow model value a company independent of peer valuation. The valuation is based on the present value of cash-flows for the specific company. Relative valuation models such as P/E ratio compare the earnings multiple to that of similar companies to make a judgment about the valuation. If the P/E ratio is higher than peer company P/E ratio, it is said to be overvalued. Conversely, if the P/E ratio is lower than peer company P/E ratio, it is said to be undervalued. Caution should be taken to make sure that peer companies are indeed comparable. For the valuation of Gold Star, absolute valuation would be suitable since it is closely held and hence market valuation is not available.
Which discounts must be taken into account while valuing the investment opportunity? Joe should take into account the:
A)
marketability, liquidity, and control premium in the valuation.
B)
marketability, liquidity, and majority discounts in the valuation.
C)
marketability, liquidity, and minority discounts in the valuation.


Since Gold Star is closely held, the investment is not easily marketable. Closely linked is the fact that the investment cannot be easily liquidated and the cost of selling the investment needs to be discounted from the value. Finally, since only 5% of the stock is being invested in, the control of the operations of the company still remains with the majority shareholders. This lack of control needs to be quantified and discounted from Gold Star’s valuation.
作者: bapswarrior    时间: 2012-3-30 15:48

An analyst should carefully review the footnotes to a firm’s financial statements to determine the:
A)
future growth rate of the firm.
B)
salaries of top executives.
C)
accounting practices and basis utilized by the firm.


A number of important disclosures regarding a firm’s accounting practices and the basis on which income and expense are recognized are contained in the footnotes to the financial statements.
作者: bapswarrior    时间: 2012-3-30 15:49

What are three factors that would make a firm's accounting earnings less of a gauge of future economic performance? Late filings, unusually:
A)
low amounts of loans to company insiders, and short tenure of senior management.
B)
high amounts of loans to company insiders, and short tenure of senior management.
C)
high amounts of loans to company insiders, and long tenure of senior management.


Quality of earnings looks at the relationship between accounting earnings and economic profit potential of the firm. An analyst is concerned about anything that would render accounting earnings less useful as a gauge of the firm’s future expected economic earnings. Warning signals include late filings, unusually high amounts of loans to company insiders, and short tenure of senior management.
作者: bapswarrior    时间: 2012-3-30 15:49

Disclosures of accounting practices and basis are often made in what part of a firm’s financial reports?
A)
Cash flow statement.
B)
Income statement.
C)
Footnotes to the financial statements.


A number of important disclosures regarding a firm’s accounting practices and the basis on which income and expense are recognized are contained in the footnotes to the financial statements.
作者: bapswarrior    时间: 2012-3-30 15:49

Notes to financial statements contain:
A)
little useful information for the analyst relative to the actual financial statements.
B)
statements by auditors.
C)
important information about the firm's accounting practices and basis of presentation.


A number of important disclosures regarding a firm’s accounting practices and the basis on which income and expense are recognized are contained in the footnotes to the financial statements
作者: bapswarrior    时间: 2012-3-30 15:50

Which of the following would cause an analyst to have concern about a firm’s quality of earnings?
A)
A firm books sales when orders are shipped.
B)
The firm took a write off for a recently impaired asset.
C)
The gain on the sale of a plant was included in operating earnings.


The inclusion of gains from the sale of assets as operating income would cause the analyst to question the quality of the firm’s earnings.
作者: bapswarrior    时间: 2012-3-30 15:50

Overestimating the growth rate of a firm in using a valuation model would result in a value that is likely to be:
A)
too high.
B)
can't tell from this information.
C)
too low.


Using an estimate for a firm’s growth rate that is too high would overstate the amount of future returns, resulting in a present value that is too high.
作者: bapswarrior    时间: 2012-3-30 15:50

Overestimating the growth rate of a firm in using a valuation model would result in a value that is likely to be:
A)
too high.
B)
can't tell from this information.
C)
too low.


Using an estimate for a firm’s growth rate that is too high would overstate the amount of future returns, resulting in a present value that is too high.
作者: bapswarrior    时间: 2012-3-30 15:50

Financial Analyst Davey Jarvis, CFA, is evaluating Laura’s Chocolates, Inc., which processes nut-based toffee for world-wide distribution. Which of the following steps is Jarvis most likely to take as part of the top-down valuation process?
A)
Perform momentum-based technical analysis.
B)
Evaluate price performance on an ongoing basis.
C)
Learn / understand the business.

The valuation process consists of 5 steps:
作者: bapswarrior    时间: 2012-3-30 15:51

Financial Analyst Davey Jarvis, CFA, is evaluating Laura’s Chocolates, Inc., which processes nut-based toffee for world-wide distribution. Which of the following steps is Jarvis most likely to take as part of the top-down valuation process?
A)
Perform momentum-based technical analysis.
B)
Evaluate price performance on an ongoing basis.
C)
Learn / understand the business.

The valuation process consists of 5 steps:
作者: bapswarrior    时间: 2012-3-30 15:51

Which of the following two ratios are likely to be used for determining value as a function of company peer benchmarks?
A)
Return on equity and net profit margin.
B)
Price-to-earnings and price-to-book.
C)
Price-to-sales and debt/equity.


Relative valuation looks at market-based ratios of comparable companies in the industry. Price-to-sales, price-to-book, price-to-earnings, and price-to-cash flow are examples of ratios used in relative valuation analysis.
作者: bapswarrior    时间: 2012-3-30 15:51

A valuation of a firm based on a review of other firms' price to earnings, price to sales, and price to return on investment ratios is an example of a:
A)
broad-based valuation.
B)
relative valuation.
C)
relative strength valuation.


An approach using market multiples to establish the value of the subject firm in relation to similar firms is an example of a relative valuation approach.
作者: bapswarrior    时间: 2012-3-30 15:52

A valuation of a firm based on the comparison of the firm with the market value of other firms is known as a:
A)
relative valuation.
B)
comparison valuation.
C)
peer group valuation.


A relative valuation is a valuation based on comparing the firm to other firms with similar characteristics. Market multiples are commonly used as the basis of relative valuations.
作者: bapswarrior    时间: 2012-3-30 15:52

A valuation of a firm based on the intrinsic value of the firm’s investment characteristics is known as an:
A)
absolute valuation.
B)
asset based valuation.
C)
absolution valuation.


An absolute valuation approach attempts to determine the value of the firm based on its specific characteristics without regard to the market prices of other firms.
作者: bapswarrior    时间: 2012-3-30 15:53

Marko Larraza recently sold a majority stake in his business, Larraza Loaves, to a national food manufacturer, and has been looking to invest the proceeds in a portfolio of actively managed equities. Larraza hired Alhaadi Wewege, a portfolio manager to help him select appropriate companies for consideration.
Larraza has researched two publicly traded companies that he would like Wewege to analyze for potential inclusion in the portfolio: Generic Gems, a wholesaler of gemstones, and Consolidated Cereals, a breakfast food manufacturer. Larraza has provided Wewege with the following information about the two firms:

Table 1: Valuation Inputs

Company

Price One
Year Ago

Current
Price

One-Year
Target
Price

Past
Year’s
Dividend

Expected
Dividend
Next Year

Generic Gems

29.00

32.50

35.00

$0.70

$0.75

Consolidated Cereals

14.00

14.25

15.00

$1.00

$1.25


Based on his knowledge of the market, Wewege believes that the required return for each company should equal the previous year’s holding period return on the relevant industry index. The Jewelry & Gemstone index returned 11% last year, while the Food & Beverage index returned 7%.
Larraza questions Wewege’s assumption about the appropriate return for Consolidated Cereals. “When I sold my bakery, I justified giving the buyer a discount on the price based on the lack of marketability and lack of liquidity since the shares aren’t publicly traded.” Wewege counters that the discount on the sale of Larraza Loaves was justified because the purchaser acquired a controlling interest, not because the shares were illiquid.
Wewege also points out that the valuation of Larraza Loaves was made using an asset-based model, which is an example of an absolute valuation model. He points out that using a liquidation value is inappropriate for a going concern. Larraza counters that Larraza Loaves was also valued using a dividend discount model, which is considered a relative valuation model. Larraza argues that a dividend discount model is an appropriate valuation approach for a going concern.
“Graham and Dodd first advanced the idea that the value of a stock could be determined by discounting future dividends,” points out Larraza, in justification of a dividend discount approach. Wewege acknowledges that Graham and Dodd’s investment valuation approach was the forerunner of the absolute valuation models of today. Are Wewege and Larraza correct in their statements concerning the price discount on the sale of Larraza Loaves?
WewegeLarraza
A)
CorrectCorrect
B)
CorrectIncorrect
C)
IncorrectCorrect


Wewege is incorrect because purchase of a controlling interest justifies a premium, not a discount. Larraza is correct that lack of marketability and lack of liquidity are both justifications for a discount in the value of a position. (Study Session 12, LOS 43.k)
An analyst is performing an equity valuation as part of the planning and execution phase of the portfolio management process. The results will also be useful for:
A)
technical analysis.
B)
communication with analysts and investors.
C)
benchmarking.


Communication with analysts and investors is one of the common uses of an equity valuation. Technical analysis and benchmarking do not require equity valuation. (Study Session 10, LOS 34.c)
Are Wewege and Larraza correct in their statements concerning absolute and relative valuation models?
WewegeLarraza
A)
CorrectIncorrect
B)
IncorrectIncorrect
C)
CorrectCorrect


Wewege is correct that an asset-based model is an absolute valuation model. Larraza is incorrect because a dividend discount model is also considered an absolute, not a relative, valuation model. (Study Session 10, LOS 34.e)
Are Wewege and Larraza correct in their statements about appropriate valuation approaches for a going concern?
WewegeLarraza
A)
IncorrectCorrect
B)
CorrectCorrect
C)
CorrectIncorrect


Wewege is correct that a liquidation valuation is an inappropriate method of valuing a going concern since liquidation value is based on the assumption that the firm will cease operation and its assets will be sold. Larraza is correct that a dividend discount model is an appropriate valuation approach for a going concern since the assumption is that the firm continues operating and the future dividends arise from its continued operations. (Study Session 10, LOS 34.b)
Which of the following quality of earnings issues is least likely to be directly addressed in the footnotes to accounting statements and other disclosures?
A)
Reclassification of non-operating items as operating income.
B)
Sustainability of growth.
C)
Choice of depreciation and amortization rates.


Sustainability of growth is not an issue directly addressed in the footnotes to financial statements, although various disclosures may provide information that has indirect implications for sustainability of growth. Choice of depreciation and amortization rates and reclassification of non-operating items as operating income are both issues of management discretion that may be discerned through a detailed examination of the footnotes. (Study Session 10, LOS 34.d)
Are Wewege and Larraza correct in their statements about Graham and Dodd?
WewegeLarraza
A)
IncorrectIncorrect
B)
CorrectIncorrect
C)
CorrectCorrect


Larraza is incorrect because Graham and Dodd determined the value of a security based on an analysis of the firm’s income statement and balance sheet. The dividend discount framework was advanced by John Burr Williams. Wewege is incorrect because the financial statement analysis approach put forth by Graham and Dodd is the forerunner of modern relative valuation models. Williams’ approach provided the foundation for modern dividend discount and free cash flow models, which are absolute valuation models. (Study Session 10, LOS 33)
作者: bapswarrior    时间: 2012-3-30 15:53

Important considerations for choosing an appropriate approach for valuing a given company are least likely to include:
A)
Is the model consistent with the investor's IPS?
B)
Is the model appropriate based on the quality and availability of input data?
C)
Is the model suitable given the purpose of the analysis?


Important considerations when choosing a valuation model include:
Does the model fit the characteristics of the company?
Is the model suitable given the purpose of the analysis?
Is the model appropriate based on the quality and availability of input data?
作者: bapswarrior    时间: 2012-3-30 15:53

An ownership perspective can be important for an analyst determining the value of a share position. A controlling interest suggests the most appropriate model is a:
A)
dividend discount model.
B)
time series model.
C)
cash flow model.


A controlling interest suggests a cash flow model may be most appropriate since the controlling interest would allow the purchaser to set dividend policy.
作者: bapswarrior    时间: 2012-3-30 15:54

One justification for using multiple models to estimate firm value is:
A)
the ability to examine differences in estimated values can reveal how a model’s assumptions and the perspective of the analysis are affecting the estimated values.
B)
the ability to streamline and economize the development process through repeated use of the same generic baseline.
C)
the ability to learn from each successive model and to make improvements.


One thing to remember with respect to choice of a valuation model is that the analyst does not have to consider only one. Using multiple models and examining differences in estimated values can reveal how a model’s assumptions and the perspective of the analysis are affecting the estimated values.



欢迎光临 CFA论坛 (http://forum.theanalystspace.com/) Powered by Discuz! 7.2