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The intrinsic value of any asset is the value of the asset given a
hypothetically complete understanding of the asset's investment
characteristics.
Leveraged buyout is an acquisition involving significant leverage
[i.e., debt], which is often collateralized by the assets of the company
being acquired.)
An aggressively optimistic estimate for the rate of return that
pension assets will earn means a larger-than-warranted deduction in
calculating pension expense, and subtrac- tion will lead to understating
pension expense and overstating net income*Check the footnotes for
return assumptions
GGM equity risk premium estimate = Dividend yield on the index based
on year-ahead aggregate forecasted dividends and aggregate market value +
Consensus long-term earnings growth rate − Current long-term government
bond yield
Recognizes that investors will not rationally incur the expenses of
gathering information unless they expect to be rewarded by higher gross
returns com- pared with the free alternative of accepting the market
price.
CostDifferentiation Focus - Focus on either Cost, or Product Differentiation
GC - Valuation assuming the firm will continue to exists LV - Value at liquidation, with no going concern assumption
Equity index price = PVFastGrowthStage(r )+ PVTransition(r ) +
PVMatureGrowthStage(r )Subtract government bond yield from this computed
IRR to get the equity risk premium when growth is not constant. *The
discount rate r that equates the sum of the present values of the
expected cash flows of the three stages to the cur- rent market price of
the equity index defines an IRR.
Quality of earnings analysis broadly includes the scrutiny of all
financial statements, including the balance sheet, to evaluate both the
sustainability of the companies' performance and how accurately the
reported information reflects economic reality.
An excess risk-adjusted return
VE -P=(V-P)+(VE -V)VE is estimated valueP is market priceand V is
intrinsic value* first component is the true miss pricing,** Second
component is the error in the estimate of the intrinsic value
The concept of value to a specific buyer taking account of potential
synergies and based on the investor's requirements and expectations is
called investment value
Fair market value is the price at which an asset (or liability) would
change hands between a willing buyer and a willing seller when the
former is not under any compulsion to buy and the latter is not under
any compulsion to sell
Decompose net income into a cash component (combining operating and
investing cash flows) and an accrual component (defined as net income
minus the cash component). *Firm with higher amount of current accruals
will have a relatively lower ROA in the future **Compared to accruals in
the current period, the cash component in the current period is more
predictive of future net income.
Intra-industry rivalry.(lower the better)New entrants (high barriers
to entry)Substitutes (few substitutes) Supplier Power (more suppliers
the better)Buyer Power (manu customers, lower power)
IV = D1/(K-g) ** restated, can solve for required return estimate as k = D1/P + g
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