Reading 33: Equity Valuation: Applications and Processes-LOS border, valuation, following, face, 2010

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Session 10: Equity Valuation: Valuation Concepts
Reading 33: Equity Valuation: Applications and Processes

LOS c: Discuss the uses of equity valuation.

 

 

 

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.

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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.

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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) fairness opinion.

B) second opinion.

C) minority opinion.

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Minority shareholders are often dependent upon an analyst's opinion about the fairness of a price to be received. Hence the term fairness opinion.

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Which of the following is least likely one of the primary steps of the top-down valuation process?

A) Selecting a valuation model.

B) Decision making.

C) Assess corporate governance.

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The valuation process consists of 5 steps:

1. Understanding the business.
2. Forecasting company performance.
3. Selecting a valuation model.
4. Complete a valuation.
5. Decision making.

Corporate governance is important, but is not one of the primary steps.

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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.

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The valuation process consists of 5 steps:

1. Understanding the business.
2. Forecasting company performance.
3. Selecting a valuation model.
4. Complete the valuation.
5. Decision making.

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When using a firm’s reported financial information as inputs into a security valuation model, it is important for the analyst to have confidence that the reported information accurately reflects the operations of the firm. This concern is referred to as:

A) a confidence factor.

B) the transparency of earnings.

C) the quality of earnings.

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The accuracy and level of detail disclosed in financial reports is referred to as the quality of earnings. Efforts of management to obscure the true operating performance of the firm can leave an analyst with little confidence in the security valuation.

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Overestimating the growth rate of a firm in using a valuation model would result in a value that is likely to be:

A) can't tell from this information.

B) too high.

C) too low.

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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.

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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.

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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.

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Notes to financial statements contain:

A) little useful information for the analyst relative to the actual financial statements.

B) important information about the firm's accounting practices and basis of presentation.

C) statements by auditors.

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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.

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Disclosures of accounting practices and basis are often made in what part of a firm’s financial reports?

A) Cash flow statement.

B) Footnotes to the financial statements.

C) Income statement.

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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.

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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.

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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.