Corporate Valuation - Key Terms

Corporate Valuation: Glossary of Terms

Accounting & Financial Statements

Accounting Consistency: Balance sheets and income statements align with retained earnings.
Accrual Basis Accounting: Revenue and costs recognized when goods/services are sold, not when cash changes hands.
Comprehensive Financial Statements: Detailed statements with nearly all possible entries.
Condensed Financial Statements: Focused statements with essential details for valuation; aggregates items from comprehensive statements.
Pro Forma Financial Statements: Projected financial statements.

Valuation Metrics & Formulas

Additional Funds Needed (AFN): Extra financing required in a given year; typically positive during growth.
Constant Growth Formula: Present value of constantly growing free cash flows.
Capital Asset Pricing Model (CAPM): Model for required return on equity: rs = rRF + Beta * (Market Risk Premium)
Constant Growth Rate Dividend Policy: Assumes dividends grow at a constant rate.
Economic Value Added (EVA): Economic value added to a company during the year. Calculated as: EVA = NOPAT – Operating Capital * (WACC)
Free Cash Flow (FCF): Cash available for distribution to investors: FCF = NOPAT - Required Investment in Operating Capital
Market Value Added (MVA): Total market value of firm minus total contributed capital.
Weighted Average Cost of Capital (WACC): After-tax cost of capital from all financing sources, weighted by market values: WACC = wdrd(1-T) + wsrs

Financial Ratios

Asset Turnover: Assets/Sales, indicates asset utilization efficiency.
Current Ratio: Current Assets/Current Liabilities
Interest Coverage Ratio: Operating Profit/Net Interest Expense
Inventory Turnover: Inventory/Sales
Net Profit Margin: Net Income/Sales
Operating Margin: EBIT/Sales
Operating Profitability: NOPAT/Sales, reflects operations' contribution to profitability.
Payout Ratio: Dividends/Net Income
Price to Book Ratio: Market Value per Share/Book Value per Share
Quick Ratio: (Current Assets – Inventory)/Current Liabilities
Receivables Turnover: Receivables/Sales
Return on Assets (ROA): Net Income/Assets
Return on Equity (ROE): Net Income/Shareholders’ Equity
Return on Invested Capital (ROIC): NOPAT/Beginning Capital

Other Key Terms

Accruals: Amounts owed but not yet paid.
Articulate: Retained earnings link between balance sheets (previous year + current year) and income statement (net income less dividends).
Basis Point: 1/100 of a percent.
Beta: Measure of a stock’s market risk.
Bond Rating: Measure of bond creditworthiness.
Bond Spread: Yield difference between corporate and treasury bonds.
Book Value: Value based on financial statements.
Capital Requirements: Capital needed to support a dollar of sales.
Cash Flow: Cash generated from business activities.
Circularity: Interdependence of spreadsheet formulas causing iterative changes.
Common Stock: Stockholders' investment in the company.
Corporate Value: Value of operations plus non-operating assets.
Cost of Capital: Return a company needs to satisfy investors.
Cost of Equity: Return stockholders require.
Cost of Goods Sold (COGS): Expenses for production activities.
Current Assets: Assets converted to cash within a year.
Current Liabilities: Liabilities paid off within a year.
Debtholder: Bond owner or bank owed money.
Depreciation: Asset's cost expensed over its life.
Dividends: Payments to shareholders.
Earnings Before Interest and Taxes (EBIT): Net income less COGS and SGA.
Earnings Per Share (EPS): Net Income/Shares Outstanding
Earnings Before Interest, Taxes, and Depreciation (EBITD): Earnings before interest, taxes, and depreciation.
Economic Profit: Generic name for Economic Value Added (EVA).
Excess Cash: Cash beyond operational needs.
External Financing: Debt or equity from newly issued securities.
Extraordinary Items: Non-recurring income statement items.
Fixed Assets: Real assets with lives longer than a year.
Fixed Payout Ratio: Dividends as a constant proportion of net income.
Fundamental Analysis: Valuing stocks based on expected cash flows.
Fundamental Value: Value from discounting expected cash flows.
Gross Margin: Gross Profit/Sales
Gross Profit: Sales - Cost of Goods Sold
Intrinsic Value: Value based on an individual's beliefs.
Market Risk Premium: Return over risk-free rate for bearing market risk: RPM = Expected Return on Market – Risk Free Rate
Market Value: Price in financial markets.
Matching Principle: Costs incorporated into income when goods are sold, not when cash payments are made.
Net Operating Profit After Taxes (NOPAT): EBIT * (1-T)
Net Working Capital: Current Assets - Current Liabilities
Non-linear Model: Projection model not linearly related to sales.
Nonoperating Asset: Asset not used in operations.
Operating Capital: Money in operating assets less operating liabilities.
Operating Current Assets: Short-term assets used in operations.
Operating Current Liabilities: Short-term liabilities used in operations.
Operating Long-Term Capital: Long-term capital used in operations.
Operating Profit: Profit from operations, usually EBIT.
Operating Working Capital: Operating current assets less operating current liabilities.
Operations: Activities producing and selling goods/services.
Plant, Property, and Equipment (PP&E): Long-term assets used in operations.
Present Value: Today’s value of future cash.
Pre-Tax Margin: Profit before taxes divided by sales
Prime Rate: Rate for customers with high credit ratings.
Principal: Initial loan amount.
Rating Agency: Analyzes companies' creditworthiness.
Recognition Principle: Revenue/costs reported when goods/services are shipped/delivered.
Residual Dividend: Dividends set to balance assets, liabilities, and equity.
Retained Earnings: Reinvested earnings.
Reverse Engineer: Deducing assumptions from a valuation model to match the current market price.
Risk Averse: Investors prefer less risk for the same return.
Risk-Free Rate: Return on long-term Treasury securities.
Selling, General, and Administrative Expenses (SGA): Overhead, advertising, and administrative expenses.
Sensitivity Analysis: Assessing how assumption changes affect valuation.
Shareholder: Company stock owner.
Short-Run Projection Period: Projections based on specific plans.
Spread: Yield difference between two assets.
Steady-State Period: Firm's growth and profitability align with industry/economy.
Stock Repurchases: Firm buys back its own stock.
Total Market Value: Market value of debt plus equity.
Value-Based Management: Managing to maximize shareholder value.
Value Driver: Factor influencing profitability and value.
Value of Equity: Common stock value.
Value of Nonoperating Assets: Market worth of non-operating assets.
Value of Operations (VOp): Present value of free cash flows discounted at WACC.
Working Capital: Current Assets.
Yield: Return on a bond held to maturity.