Question 1

Contrast the first step in the valuation process of an established company and a high-growth company.Explain the reason for the difference in approaches.

Accepted Answer

For an established company,the first step is to analyze historical performance.For a high-growth company,the analyst should begin with the future,focusing on the size of the potential market,the forecasted level of sustainable profitability,and an estimate of the investments necessary to achieve scale.The reason for the difference is that the past does not have much information on the prospects of high-growth companies.

Question 2

For a high-growth company,accounting records of current performance are likely to mix together investments and expenses,so,when possible,capitalize hidden investments,even those expensed under traditional accounting rules.

Accepted Answer

High-growth companies often have a mix of investments and expenses that can blur the line between current performance and future potential. Therefore, it is recommended to capitalize hidden investments, even those that are traditionally expensed, whenever possible to provide a more accurate representation of the company's overall value.

Question 3

To estimate the size of a potential market for a high-growth company,start by assessing how the company fulfills a customer need.Then determine how the company generates (or plans to generate )revenue.

Accepted Answer

Yes, to estimate the size of a potential market for a high-growth company it is important to assess how the company fulfills a customer need and how they generate revenue. This will give an idea of the market size and growth potential for the company.

Question 4

When valuing a high-growth company,it is not recommended to begin with historical financial results;instead,begin with the future.

Accepted Answer

When valuing a high-growth company, it is important to look at its future growth potential rather than focusing on its historical financial results. This is because high-growth companies may not have a long history of financial results to analyze, and their value is largely determined by their potential for future growth and earnings. Therefore, it is necessary to focus on future trends, market opportunities, and industry dynamics to determine their valuation.

Question 5

In the probability-weighted scenario approach,which of the following are recommended for consideration in composing and calibrating scenario weights?
I.Competitor margins.
II.Option implied volatility.
III.Market size and market share.
IV.Historical performance of other high-growth companies.

A)I and II only.
B)I,II,and III only.
C)I,III,and IV only.
D)II,III,and IV only.

Accepted Answer

Competitor margins, market size, and market share, as well as historical performance of other high-growth companies, are relevant factors in composing and calibrating scenario weights in a probability-weighted scenario approach. Option implied volatility is not typically considered in this context.

Question 6

Which of the following are correct concerning the approach the analyst should take when evaluating a high-growth company?
I.Think in terms of probabilities.
II.Begin the process by starting from the future rather than the present.
III.Understand the economics of the business model compared with peers.
IV.Remember that the DCF approach is an essential tool for understanding the value of high-growth companies.

A)I and II only.
B)I,II,and III only.
C)I and IV only.
D)I,II,III,and IV.

Accepted Answer

When evaluating high-growth companies, analysts should think in terms of probabilities due to the inherent uncertainties, start the analysis by envisioning the company's future potential, understand the economics of the business model in comparison with peers to assess competitive advantage and scalability, and use the Discounted Cash Flow (DCF) approach as a fundamental tool to estimate the present value of future cash flows, which is crucial for understanding the value of high-growth companies.

Question 7

Using the real-options approach to value a high-growth company has an advantage over the discounted cash flow method in that it requires fewer estimates (e.g. ,it does not require a long-term revenue growth rate).

Accepted Answer

The real-options approach often requires more complex estimates and assumptions, including volatility and the value of various options, in addition to the estimates required by the discounted cash flow method.

Question 8

When looking into the future,the analyst should define a point in the future where the company's performance is likely to stabilize.The conditions at that point should be defined and bounded by measures of operating performance.Which of the following are those measures of operating performance?
I.Amortization.
II.Penetration rates.
III.Sustainable gross margins.
IV.Average revenue per customer.

A)I and II only.
B)I and IV only.
C)II and III only.
D)II,III,and IV only.

Accepted Answer

Penetration rates, sustainable gross margins, and average revenue per customer are measures of operating performance that help in defining the future stabilization point of a company. Amortization is more related to accounting practices and the gradual reduction of debt or the allocation of intangible asset cost over time, rather than a direct measure of operating performance.

Question 9

An analyst computes the intrinsic values and probabilities for each of the indicated scenarios in the following table.Determine the expected value per share. $\begin{array} { | l | l | l | l | } \hline \text { Scenario } & \begin{array} { l } \text { Intrinsic value } \\\text { (millions) }\end{array} & \text { Probability } & \\\hline \begin{array} { l } \text { Success in both domestic } \\\text { and international markets }\end{array} & 1200 & 0.4 & \\\hline \text { Success in domestic market only. } & 600 & 0.2 & \\\hline \text { Success in int emational market only. } & 800 & 0.3 & \\\hline \text { Failure in both markets } & 0 & 0.1 & \\\hline { \text { Expected intrinsic value (millions): } } & \\\hline \text { Shares outsta nding } 50 \text { million } & \text { Expected share price } & \\\hline\end{array}$

A)13.00
B)16.00
C)16.80
D)17.50

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Accepted Answer

To calculate the expected intrinsic value per share, multiply each scenario's intrinsic value by its probability, sum these products, and then divide by the number of shares outstanding. The calculation is as follows:$$ \text{Expected Value} = \frac{(1200 \times 0.4) + (600 \times 0.2) + (800 \times 0.3) + (0 \times 0.1)}{50} $$$$ \text{Expected Value} = \frac{(480) + (120) + (240) + (0)}{50} $$$$ \text{Expected Value} = \frac{840}{50} = 16.8 $$Therefore, the expected value per share is $16.80.

Question 10

Which of the following is the recommended method for dealing with the uncertainty of high-growth companies?&#10;A)Real options.&#10;B)Risk premium approach.&#10;C)Monte Carlo simulation.&#10;D)Probability-weighted scenarios.

Accepted Answer

The answer of Which of the following is the recommended...

Question 11

Which of the following are true concerning the use of price-to-earnings multiples to evaluate a high-growth company?
I.They cannot be used when earnings are negative.
II.They provide insight into what drives the company's valuation.
III.They generate imprecise results when earnings are highly volatile.
IV.They account for the unique characteristics of each company in a fast-changing environment.

A)I and II only.
B)I and III only.
C)II and III only.
D)III and IV only.

Accepted Answer

The answer of Which of the following are true concerning...

Deck 32: Valuing High-Growth Companies