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Valuing a Business
The analysis and appraisal of closely held companies
68
Business
Professional
07/19/2011

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