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Valuation of individual investments (equity (discounted dividend model…
Valuation of individual investments
valuation methods (SHAM FADS)
market value
easily obtainable
objective
realisable value of an asset, so suitable for discontinuance valuations
well understood
may be required by regulation
more than one market value likely to exist
only known for certain at time of sale
may not exist or be up to date
volatile
difficult to value liabilities in a consistent market related way
discounted cashflow
consistent with a discounted cashflow approach to value liabs
stable if assumptions are not changed too frequently
employs actuarial judgement, so can adjust out influence of market sentiment
subjective
time consuming
not well understood by clients
not suitable for short-term valuations
stochastic
uses discounted cashflow method
future cashflows or interest rate treated as random variable with a specified probability distribution
model is run many times
output is a distribution of results from which the expected asset value and volatility can be calculated
bonds
discounted cashflow
equity
market value
discounted dividend model
simplified
V= D/(i-g)
net asset value
measurable key factor approach
relationship between factor and the market price of other quoted companies is then used as a basis for valuation
Economic Value Added (EVA)
swaps
discounted cashflow of income-outgo
as a sum of a series of forward arrangements