Question

In: Accounting

What's the difference between valuation and valuation models? Why is it important to consider dollar returns...

What's the difference between valuation and valuation models?

Why is it important to consider dollar returns and not just percentage returns?

What is a capital gain? 5. What are annuities and perpetuities?

What is the formula for the present value of perpetuity? An annuity?

What are the assumptions of the annuity and perpetuity models? 8. What is the GVE in words? As an equation?

How can growing perpetuity or annuity be converted into a constant equivalent for valuation purposes?

Solutions

Expert Solution

Valuation can be defined as the analytical process of determining the current worth or current value of an asset or a company. This analytical process is also used for determining the projected worth of an asset. In other words it is a quantitative process with regards to determining the fair value of an asset or a firm. Valuation models, on the other hand, are models that help with the computation of the fair value. There are different valuation models like discounted cash flow (DCF) model, sum of the parts valuation model, relative valuation model etc.

It is important to consider dollar returns and not just percentage returns so as to be able to get a full context of the situation. It should be noted that a high percentage might not always equal a high dollar amount return and hence in order to get a comprehensive and proper understanding of the situation at hand it is important to consider dollar returns and not just percentage returns.

Capital gain can be defined as the rise in the value of a capital asset, making its worth higher than the purchase price. Capital asset can be an investment asset like a share or it can be real estate also. Capital gain is only realized when the asset is sold.

Annuities are stream of constant cash flows (payment or receipt) occurring at regular intervals of time. For example premium payments of a life insurance policy can be regarded as an annuity. Perpetuities are annuities of infinite duration. Thus an annuity with infinite duration is called perpetuity.

Present value of a perpetuity = A/r. In this formula A is the constant annual payment and r is the discount rate. Present value of annuity = A{[(1+r)^n -1]/r (1+r)^n}. In this formula A is the constant annual payment and r is the discount rate, n is the number of years/periods.


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