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Common-size statements
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financial statements in which each line is expressed as a percentage of the total; on balance sheet each line item is shown as a % of total asssets, and on the income statement, each item is expressed as a % of sales
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financial risk
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degree of uncertainty of realizing the expected future returns of the business resulting from leverage
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Liquidity Discount
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% deducted from value due to inability to convert any interest of company into cash
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Adjusted Book Value
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book value after asset of liability amounts are added to, deleted from, or changed from the book amounts
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invested capital net cash flows
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cash flows that are available to pay out to equity holders(in form of dividends) and debt investors( in form of principal and interest) after funding the operations of the business enterprise and making necessary capital investments
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Normalized financial statements
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Financial statements adjusted for nonoperating assets and liabilities for nonrecurring noneconomic or other unusual items to eliminate anomalies and or facilities comparison.
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Market capitalization of invested capital
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market cap of equity + market value of the debt component of invested capital
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CAPM
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Capital Asset Pricing Model: model with cost of capital for any stock or portfolio of stocks equals risk free rate +risk premium(Beta)
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Excess earnings
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amount of anticipated economic benefits that exceeds an appropriate rate of return on the value of a selected asset base(net tangible assets) used to generate those anticipated economic benefitis
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Economic benefits
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inflows such as revenues, net income, net cash flows
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Normalized earnings
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economic benefits adjusted for nonrecurring noneconomic or other unusual items to eliminate anomalies and or facilitate comparisons
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Cash Flow
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cash generated by asset or business over period of time
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Equity Net cash flows
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cash flows available to pay out to equity holders(dividends) after funding the operations of the business enterprise, making necesary capital investments, and increasing or decreasing debt financing
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Business Enterprise
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commercial industrial, or investment entity pursuing an economic activity
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Discretionary Earnings
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Earnings before: Income tax, Nonoperating income and expenses, nonrecurring income and expenses, Depreciation and amort, Interest expense or income,Owners total compensation
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Capitalization Factor
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any multiple of divisor used to convert the anticipated economic benefits of a single period into value
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return on equity
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amount expressed as a percentage, earned on a company s common equity for a given period
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Net Asset
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total assets less total liabilities
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Sustaining CapitalReinvestment
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periodic capital outlay required to maintain operations at existing levels net of the tax shield available from such outlays
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Net Book Value
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difference between total assets(net accum dep, depletion, and amortization) and total liabilities as the appear on the balance sheet, with respect to a specific asset, the capitalized cost less accum amort or dep as it appears on the books of account of the business enterprise
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Key person discount
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% deducted from the value of an ownership interest due to loss of personnel
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Discounted future earnings method
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method PV of future expected economic benefits is calculated using a discount rate
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Intangible assets
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nonphysical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities, and contracts that grant rights and privileges and have value for the owner
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Beta
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measure of systemic risk; correlated with changes in a specific index
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Portfolio Discount
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amount or percentage deducted from the value of a business enterprise to reflect the fact that it owns dissimilar operations or assets that do no fit well together
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Capitalization of earnings method
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method within income approach whereby economic benefits for a representative single period are converted to value through division by cap rate
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Marketability
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ability to quickly convert to cash at minimal cost; easy transfer or slavility of an asset, business, business ownership
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levered Beta
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beta reflecting a capital structure that includes debt
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IRR
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discount rate at which the present value of the future cash flows of the investment equals the cost of the investment
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Capital Structure
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composition of the invested capital of a business enterprise; mix of debt and equity
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Marketability Discount
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% deduction from value due to inability to maket the company
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Capitalization
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conversion of a single period economic benefits into value
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Price/earnings multiple
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price per share divided by earningspershare
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Economic Life
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period of time over which property may generate ecnomic benefits
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Multiple
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inverse of cap rate
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Business risk
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degree of uncertainty of realizing the expected future returns of the business resulting from factors other than financial leverage
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Blockage Discount
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% deducted from price of public stock due to the size such that couldnt be sold in reasonable time
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Equity risk premium
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rate of return added to risk-free rate to reflect the additional risk of equity instruments over risk-free instruments
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Market multiple
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market value of a companys stock of invested capital divided by a company measure(ie company benfits or number of customers)
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Equity
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owners interest in property after decuction of all liabilities
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Control premium
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amount or a percentage by which the pro rata value of a controlling interest exceeds the pro rata value of a noncontrolling interest in a business enterprise, to reflect the power of control
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Unlevered Beta
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beta reflecting no debt
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Discounted Cashflow Method
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method within the income approach whereby the present value of future expected net cash flows is calculated using a discount rate
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Intrinsic value
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value that an investor considers, on the basis of an evaluation or available facts to be the true or real value that will become the market value when other investors reach the same conclusion. Options: difference between the exercise price or strike price of an option
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control
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power to direct the mngmt and policies of a business enterprise
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Discount rate
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rate of return used to convert a future monetary sum into present value
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WACC
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cost of capital determined by taking the weighted average at market value of the cost of all financing sources in the business enterprises capital structure
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Goodwill
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intangible asset that arises as a result of name reputation customer loyalty location products and similar factors not separately indentified
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Arbitrage pricing theory
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multivariate model for estimating the cost of equity capital that incorporates several systematic risk factors
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Net tangible asst value
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value of the business enterprise tangible assts minus value of liabilities
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Market capitalization of equity
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share price of publicly traded stock multiplied by the number of shares outstanding
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Capitalization rate
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any divisor used to convert the anticipated economic benefits of a single period into value
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Net cash flow
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when the term is used it should be supplemented by a qualifier, ie equity net cash flows and invested capital net cash glows
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Invested Capital
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sum of equity and debt in a business enterprise
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Premise of value
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assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation
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cost approach
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determine value by qualifying the amount of mney required to replace the future service capability of that asset
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Market approach
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valueation by comparing to similar assets
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Nonoperating assets
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assets that are not necessary to the ongoing operations of the business enterprise
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residual value
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value as of the end of the discrete projection period in a discounted future earnings model
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rate of return
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amount of income(loss) and/or change in value realized or anticipated on an investment expressed as a percentage of that investment
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redundant assets
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nonoperating assets
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Cost of Capital
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expected rate of return that the market requires in order to attract funds to particular investment
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Excess earnings method
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specific way of determining a value: sum of value of assets derived by capitalizing excess earnings and the value of the selected asset base
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Asset Based Approach
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determine value for a business by using value of assets net liabilities
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Adjusted book value method
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all assets and liabilities are adjusted to the fair market values
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Fair Market value
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price, expressed in terms of cash equivalents
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Control Discount
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deducted amount pro rata share to reflect absence of some or all power of control
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return on investment
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return on invested capital and return on equity
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