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Financial Terms related to Value This document is part of the valuable contents available at www.ftpall.com, a free online glossary with more than five thousand financial and business terms. This document can be copied and distributed freely Find thousands of financial terms at www.ftpall.com respecting its original format. It is forbidden its transcription, translation or change on its format without authorization of its author or editor. VALUE Adjusted present value • Abbreviated APV. The net present value analysis of an asset if financed solely by equity (present value of un-levered cash flows), plus the present value of any financing decisions (levered cashflows). In other words, the various tax shields provided by the deductibility of interest and the benefits of other investment tax credits are calculated separately. This analysis is often used for highly leveragedtransactions such as a leverage buy-out. Annualized net present value anpv approach • An approach to evaluating unequal-lived projects that converts the net present value of unequal-lived, mutually exclusive projects into an equivalent (in NPV terms) annual amount. Assessed value www.ftpall.com 2|Page • Is the taxable basis of a property. It is imposed by the municipality. Often it is at a fraction of the market value. Equally, as important, is the rate of taxation on that assessed value. Assessed values may differ substantially from market values and appraised values. Bond value • With respect to convertible bonds, the value the security would have if it were not convertible apart from the conversion option. Book value Find thousands of financial terms at www.ftpall.com • A company's book value is its total assets minus intangible assets and liabilities, such as debt. A company's book value might be more or less than its market value. • The strict accounting value of an asset, calculated by subtracting its accumulated depreciation from installed cost. Also, the total value of common equity at the date of the balance sheet. • Usually Book Value per Share. Calculated by dividing the net worth of a company (common stock plus retained earnings) by the number of shares outstanding. This is the accounting value of a share of stock, the value of the company's assets that a shareholder would theoretically receive if a company were liquidated. The book value may have no similarity to the actual cost per share on the stock market (called market value), or even to the sum of money that the shareholder would receive if the company dissolved. Companies that are running their businesses very successfully may sell at many times their book value, while those doing poorly may sell at a discount to their book value. Increasing book value generally indicates that the company is accumulating assets faster than debt - a good sign. Decreasing book value may be due to research and development expenses, writing down assets, losing money from operations, or issuing more shares. • The value at which a debt security is shown on the holder's balance sheet. Book www.ftpall.com 3|Page value is often acquisition cost + amortization accretion, which may differ markedly from market value. It can be further defined as "tax book," "accreted book," or "amortized book" value. Book value per share • The amount per share of common stock that would be received if all of the firm's assets were sold for their exact book (accounting) value and the proceeds remaining after paying all liabilities (and preferred shares) were divided among the common shareholders. Find thousands of financial terms at www.ftpall.com • The ratio of stockholder equity to the average number of common shares. Book value per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation (and not necessarily market valuation). • See Book Value. Book value weights • Weights that use accounting values to measure the proportion of each type of capital in the firm's financial structure; used in calculating the weighted average cost of capital. Carrying value • Book value. Cash surrender value • An amount the insurance company will pay if the policyholder ends a whole life insurance policy. Conversion or stock value • The value of a convertible security measured in terms of the market price of the common shares into which it can be converted. Conversion value www.ftpall.com 4|Page • Also called parity value, the value of a convertible security if it is converted immediately. Current principal value • Is the adjusted outstanding amount of mortgage indebtedness. It is computed by multiplying the initial principal amount by the Current Principal Factor. This factor reflects any accretions in part due to negative amortization, any ordinary principal payments and accelerated principal payments. The greater the divergence between the ordinary expectation for principal and current principal amount is a reflection of Find thousands of financial terms at www.ftpall.com the prepayment events. Economic value added • Abbreviated EVA. A popular measure, used by many firms to determine whether an investment contributes positively to the owners' wealth; calculated by subtracting the cost of funds used to finance an investment from its after-tax operating profits. Exercise value • The amount of advantage over a current market transaction provided by an in-the- money option. Expected value • The weighted average of a probability distribution. • Is viewed as an anticipated, theoretical or fair value for an instrument. Expected value of a return • The most likely return on a given asset. Expected value of perfect information • The expected value if the future uncertain outcomes could be known minus the expected value with no additional information. Extraordinary positive value www.ftpall.com 5|Page • A positive net present value. Extrinsic value • Is the time value component of an option premium. Face value • See: Par value. • See Par. Face value of a bond Find thousands of financial terms at www.ftpall.com • The value that appears on the face of a bond that indicates the bond s value at its maturity date. Fair value • Is viewed as the indifference point from a modeling perspective as to whether to buy or sell an instrument or market. If the market price were higher than fair value it would suggest selling the security. If the security was trading at less than fair value it would suggest buying it. When coupled with related derivative instruments, the approach becomes an arbitrage one. Fair value difference • Is the disparity between an instrument s trading price and its computed value. Firm's net value of debt • Total firm value minus total firm debt. Future value • The amount of cash at a specified date in the future that is equivalent in value to a specified sum today. • The value of a present amount at a future date found by applying compound interest over a specified period of time. www.ftpall.com 6|Page • Suppose you invest $100 at 10% for 1 year. At the end of one year, you will receive 100 + 0.1 x 100 = (1 + 0.1) x l00 = $110. This amount, $110 is called the future value of $100 invested at 10% for 1 year. Future value interest factor • The multiplier used to calculate at a specified interest rate, the future value of a present amount as of a given time. Future value interest factor for an annuity Find thousands of financial terms at www.ftpall.com • The multiplier used to calculate the future value of an ordinary annuity at a specified interest rate over a given period of time. Interest discounted annually present value of reversion • Is calculated by the following formula: Amount = (1 + interest rate)-t or, Amount = __1___ (1 + i)t where i is the interest rate and t is expressed decimally (.05 for 5 percent). Also, t is the time and .5 refers to 1/2 of a year, 2 equals 2 years and 7.75 equals 7 3/4 years. Interest impact on present value of ordinary annuity of 1 per period • Is calculated by the following formula: Amount = 1 -[1/(1+i)t] i where i is the interest rate and t is expressed decimally (.05 for 5 percent). Also, t is the time and .5 refers to 1/2 of a year, 2 equals 2 years and 7.75 equals 7 3/4 years. Intrinsic value • Is the amount that an option is in-the money. Intrinsic value common stock • Inherent worth. Intrinsic value of a firm www.ftpall.com 7|Page • The present value of a firm's expected future net cash flows discounted by the required rate of return. Intrinsic value of an option • The amount by which an option is in-the-money. An option which is not in-the- money has no intrinsic value. Related: in-the-money. Intrinsic value warrant • The positive difference between the current market price of a firm's common Find thousands of financial terms at www.ftpall.com shares and the exercise price of the warrant. Investment value • Related: straight value. Liquidation value • Net amount that could be realized by selling the assets of a firm after paying the debt. • Is the expected or realized value of cash remaining after a complete liquidation occurs. Liquidation value per share • The actual amount per share that would be received if all of the firm's assets were sold for their market value, liabilities (and preferred shares) are paid, and any remaining money were divided among the common shareholders. Loan value • The amount a policy holder may borrow against a whole life insurance policy at the interest rate specified in the policy. Market value • The price at which a security is trading and could presumably be purchased or www.ftpall.com 8|Page sold. • (1) The price at which a security is trading and could presumably be purchased or sold. (2) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares. • The price at which a security is trading and could presumably be purchased or sold. Market Value accounting reflects the current prices of all assets and liabilities. • The price at which investors buy or sell a share of common stock or a bond at a given time. Market value is determined by the interaction between buyers and Find thousands of financial terms at www.ftpall.com sellers. • Is the value of an open position. It is determined by multiplying the known or implied prevailing price by the quantity. Market value ratios • Ratios that relate the market price of the firm's common stock to selected financial statement items. Market value weighted index • An index of a group of securities computed by calculating a weighted average of the returns on each security in the index, with the weights proportional to outstanding market value. Market value weights • Weights that use market values to measure the proportion of each type of capital in the firm's financial structure; used in calculating the weighted average cost of capital. Maturity value • Related: par value. Net adjusted present value • The adjusted present value minus the initial cost of an investment. www.ftpall.com 9|Page Net asset value • NAV is the price of a share in a mutual fund or investment company. This price is calculated once or twice daily. Net asset value is the amount by which the assets' value exceeds the company's liabilities. It is calculated by adding up the market value of all securities owned by the company, subtracting the company's liabilities, and dividing this value by the number of shares of the company outstanding. Thus, the NAV indicates the current buying or selling price of a share in an investment company. Find thousands of financial terms at www.ftpall.com • Abbreviated NAV. The value of a fund's investments. For a mutual fund, the net asset value per share usually represents the fund's market price, subject to a possible sales or redemption charge. For a closed end fund, the market price may vary significantly from the net asset value. • Abbreviated NAV. The value of a Mutual Fund share calculated once a day, based on the closing market price for each security in the fund's portfolio. It is computed by deducting the fund's liabilities from the total assets of the portfolio and dividing this amount by the number of shares outstanding. • Refers to the value of a share or unit of investment. It is computed by adjusting the market value of all investments by the liabilities. Then this net dollar amount is divided by the number of shares or units outstanding. Unless there are additional charges to be imposed upon redemption, the Net Asset Value becomes the bid and transaction market price. Most open end funds only calculate transactional net asset values once a day based on the closing and settlement prices. Net book value • The current book value of an asset or liability; that is, its original book value net of any accounting adjustments such as depreciation. Net present value www.ftpall.com 10 | P a g e • Abbreviated NPV. The present value of the expected future cash flows minus the cost. • Abbreviated NPV. A sophisticated capital budgeting technique; found by subtracting a project's initial investment from the sum of the present value of its cash inflows discounted at a rate equal to the firm's cost of capital. • NPV shows the change in wealth as a result of taking a project. NPV is computed as the discounted cash flows. To maximize wealth, take all projects with positive NPV and reject all projects with negative NPV. Find thousands of financial terms at www.ftpall.com • Is one of the building block processes for finance. It provides a methodology for evaluating and pricing securities and projects. In a simple case it is the discount mechanism for a zero coupon security. Here, there is one payment predicated either on interest or principal. By knowing the time left to maturity, assuming no option features, and knowing the discount rate, one can price or evaluate the zero coupon. Pricing bonds is an extension of this process. Now, instead of evaluating, one payment, there is an entire interest and principal payment stream. For equities, the process evaluates expected cash or dividend flows and the residual value of the enterprise. Complexity arises when there are multiple discount rates (bids and offers), yield curve shapes, and credit differences. Even the selection of discrete, compounding or accretion modeling can make a substantial impact on the value of a simple zero coupon bond. Net present value approach • An approach to capital rationing that is based on the use of present values to determine the group of projects that will maximize owners' wealth. Net present value of future investments • The present value of the total sum of NPVs expected to result from all of the firm's future investments. www.ftpall.com 11 | P a g e Net present value of growth opportunities • A model valuing a firm in which net present value of new investment opportunities is explicitly examined. Net present value profiles • A table and/or graph that shows the net present value for a project at various discount rates. Net present value rule Find thousands of financial terms at www.ftpall.com • An investment is worth making if it has a positive NPV. Projects with negative NPVs should be rejected. Net salvage value • The after-tax net cash flow for terminating the project. Original face value • The principal amount of the mortgage as of its issue date. Par value • Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date. Par value stocks • Is the accounting term for the capitalization of the equity. It is usually arbitrary. Parity value • Related: conversion value Present value • The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future. • The current dollar value of a future amount. The amount of money that would have www.ftpall.com 12 | P a g e to be invested today at a given interest rate over a specified period to equal the future amount. • Suppose you wish to receive $110 one year from now. How much must you invest today at 10%? We already know the answer: $100. $100 is called the present value of $110 at 10%. • The value today of a future payment or stream of payments, discounted at some appropriate interest rate. Present value factor Find thousands of financial terms at www.ftpall.com • Factor used to calculate an estimate of the present value of an amount to be received in a future period. Present value interest factor • The multiplier used to calculate at a specified discount rate the present value of an amount to be received in a future period. Present value interest factor for an annuity • The multiplier used to calculate the present value of an annuity at a specified discount rate over a given period of time. Present value of a future payment • The value today of a future payment discounted at an appropriate rate of interest. Present value of growth opportunities • (NPV) Net present value of investments the firm is expected to make in the future. Price value of a basis point • Abbreviated PVBP. Also called the dollar value of a basis point, a measure of the change in the price of the bond if the required yield changes by one basis point. Relative value www.ftpall.com 13 | P a g e • The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to another, or for a given instrument, of one maturity relative to another. • The ratio of the current PE to the five-year Average PE. It measures whether the current value of the stock is less or more than the average value that investors were willing to pay during the last five years. The current PE is affected by current price and earnings. The average PE depends upon any changes made to average high and low PEs. Attractively valued stocks have a relative value of one or less. A range of about 0.75 to 1.10 may be Find thousands of financial terms at www.ftpall.com acceptable. Lower relative values may indicate a risky situation. • Is the comparative analysis between two or more assets. It is also a form of spread trading. • The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to another, or for a given instrument, of one maturity relative to another. Replacement value • Current cost of replacing the firm's assets. Residual value • Usually refers to the value of a lessor's property at the time the lease expires. Salvage value • The net amount received after tax when a project is terminated and an asset is sold. • Is the amount remaining after a depreciated useful life. It refers to the residual or recoverable value of a depreciated asset. It should be noted that the gross salvage value may be adjusted by a removal or disposal cost. This adjustment would lower the gross salvage value. • Scrap value of plant and equipment. www.ftpall.com 14 | P a g e Standardized value • Also called the normal deviate, the distance of one data point from the mean, divided by the standard deviation of the distribution. Stated value • The value of of the preferred share on the issue date. Ususally $10, $20, $25, $50 or $100. Preferred shares receive a dividend that is based on the state value and it is constant as long as the preferred share remains outstanding. Find thousands of financial terms at www.ftpall.com • See Par. Straight bond value • The price at which a convertible bond would sell in the market without the conversion feature. Straight value • Also called investment value, the value of a convertible security without the con- version option. Surrender value • The amount that an insurance policyholder is entitled to receive when he or she discontinues coverage. Terminal value • The value of a bond at maturity, typically its par value, or the value of an asset (or an entire firm) on some specified future valuation date. • Refers to the financial remainder, residual amount, or end-of-process (life) valuation. Some examples are the remaining value of an expired option or hedge position. It may also refer to a non-discounted or discounted financial value for an investment. Time value www.ftpall.com 15 | P a g e • Has two general meanings. The first is the value or amount of a sum of money adjusted by an interest rate for a given time period. The second common usage is in the context of options. Here, it defines the amount of premium attributed to the remaining term of the option after factoring out any in-the money component. Is multiplicative factor which is dependent on the time remaining to expiration and the attendant volatility. However, time value is not proportional but tends to more nearly approximate a square root function. Time value of an option Find thousands of financial terms at www.ftpall.com • The portion of an option's premium that is based on the amount of time remaining until the expiration date of the option contract, and that the underlying components that determine the value of the option may change during that time. Time value is generally equal to the difference between the premium and the intrinsic value. Related: in-the-money. Time value of money • The idea that a dollar today is worth more than a dollar in the future, because the dollar received today can earn interest up until the time the future dollar is received. Undervalued • A stock selling below the liquidation value or the market value that analysts believe it deserves. Fundamental Analysts try to spot such companies to buy them before they become fully valued. For example, a stock may be undervalued because the industry is out of favor, or because the company is not well known or has an erratic history of earnings. Unit value • (1) In terms of Mutual Funds, members buy shares of the fund that are worth a specified amount the unit value and that amount changes proportionally with the success or failure of the stocks in the mutual fund. This ensures that each member's www.ftpall.com 16 | P a g e share in the success or failure of the stocks is proportionate to their investment. (2) In terms of Invesment Clubs, a method of distributing earnings or sharing in losses, proportional to members investment, is to designate a unit value that allows members to choose how much they wish to invest. Each unit value is proportionally affected by the success or failure of the club's chosen stocks. This way, members can invest different amounts in the club without having to share equally in the earnings or losses. Utility value Find thousands of financial terms at www.ftpall.com • The welfare a given investor assigns to an investment with a particular return and risk. Value added tax • Method of indirect taxation whereby a tax is levied at each stage of production on the value added at that specific stage. Value additivity principal • Prevails when the value of a whole group of assets exactly equals the sum of the values of the individual assets that make up the group of assets. Stated differently, the principle that the net present value of a set of independent projects is just the sum of the net present values of the individual projects. Value at risk • Is the methodology which measures the sensitivity of a portfolio or firm's position with parametric statistical techniques. It uses historical information to estimate the impact of various standard deviation events upon the value of the holdings and the associated impact on earnings. Value at risk model • Abbreviated VAR. Procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical www.ftpall.com 17 | P a g e market price trends, correlations, and volatilities. Value date • In the market for Eurodollar deposits and foreign exchange, value date refers to the delivery date of funds traded. Normally it is on spot transactions two days after a transaction is agreed upon and the future date in the case of a forward foreign- exchange trade. • In the market for Eurodollar deposits and foreign exchange, value date refers to the delivery date of funds traded. Normally it is on spot transactions two days after a Find thousands of financial terms at www.ftpall.com transaction is agreed upon and the future date in the case of a forward foreign exchange trade. Value dating • A procedure used by non-U.S. banks to delay, often for days or even weeks, the availability of funds deposited with them. • Refers to when value or credit is given for funds transferred between banks. Value fund or value stocks • A fund that invests in stocks with prices that are below average in relation to their current earnings because they are considered to have below-average growth prospects. Value funds • Are mutual or hedge funds which invest in apparently undervalued companies. These companies on a quantitative basis may exhibit lower-than-average ratios, such as price/earnings, price/sales, or book value. Nevertheless, these stocks are viewed by participants as being bargain priced or value attractive. Value line financial strength • A ranking assigned by the Value Line Investment Survey which rates companies in www.ftpall.com 18 | P a g e ten categories according to their financial strength, from A+ (excellent) to C (poorest). Value line safety • A ranking assigned by the Value Line Investment Survey which assesses a company's financial strength and measures the total risk of investing in the stock. The ranking ranges from 1 to 5, with 1 the highest, 3 is average, and 5 is lowest. Value manager Find thousands of financial terms at www.ftpall.com • A manager who seeks to buy stocks that are at a discount to their fair value and sell them at or in excess of that value. Often a value stock is one with a low price to book value ratio.