Reading 35: Equity Valuation: Applications and Processes-LOS class, examine, possible, valuation, 2011

土豆妮

Session 10: Equity Valuation: Valuation Concepts
Reading 35: Equity Valuation: Applications and Processes

LOS a: Define valuation and intrinsic value, and explain possible sources of perceived mispricing.

 

 

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.

土豆妮

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) market value.

C) intrinsic 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.

土豆妮

Valuation models for equities contain estimates of required returns and:

A) an assumed continuation of past cash flows.

B) known future cash flows.

C) expected 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.

土豆妮

How can we account for different valuations for the same firm from several analysts even if they use the same required returns?

A) The analysts may be biased with personal opinions about management.

B) Valuation models contain random errors.

C) Valuations are based on the analyst's expectations.

---

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.