Business valuation

Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and many other business and legal purposes.

Standard and premise of value

Before the value of a business can be measured, the valuation assignment must specify the reason for and circumstances surrounding the business valuation. These are formally known as the business value standard and premise of value. The standard of value is the hypothetical conditions under which the business will be valued. The premise of value relates to the assumptions, such as assuming that the business will continue forever in its current form (going concern), or that the value of the business lies in the proceeds from the sale of all of its assets minus the related debt (sum of the parts or assemblage of business assets).

Business valuation results can vary considerably depending upon the choice of both the standard and premise of value. In an actual business sale, it would be expected that the buyer and seller, each with an incentive to achieve an optimal outcome, would determine the fair market value of a business asset that would compete in the market for such an acquisition. If the synergies are specific to the company being valued, they may not be considered. Fair value also does not incorporate discounts for lack of control or marketability.

Note, however, that it is possible to achieve the fair market value for a business asset that is being liquidated in its secondary market. This underscores the difference between the standard and premise of value.

These assumptions might not, and probably do not, reflect the actual conditions of the market in which the subject business might be sold. However, these conditions are assumed because they yield a uniform standard of value, after applying generally-accepted valuation techniques, which allows meaningful comparison between businesses which are similarly situated.

Elements of business valuation

Economic conditions

A business valuation report generally begins with a description of national, regional and local economic conditions existing as of the valuation date, as well as the conditions of the industry in which the subject business operates. A common source of economic information for the first section of the business valuation report is the Federal Reserve Board’s Beige Book, published eight times a year by the Federal Reserve Bank. State governments and industry associations also publish useful statistics describing regional and industry conditions.

Financial analysis

The financial statement analysis generally involves common size analysis, ratio analysis (liquidity, turnover, profitability, etc.), trend analysis and industry comparative analysis. This permits the valuation analyst to compare the subject company to other businesses in the same or similar industry, and to discover trends affecting the company and/or the industry over time. By comparing a company’s financial statements in different time periods, the valuation expert can view growth or decline in revenues or expenses, changes in capital structure, or other financial trends. How the subject company compares to the industry will help with the risk assessment and ultimately help determine the discount rate and the selection of market multiples.

Normalization of financial statements

The most common normalization adjustments fall into the following four categories:

Comparability Adjustments. The valuer may adjust the subject company’s financial statements to facilitate a comparison between the subject company and other businesses in the same industry or geographic location. These adjustments are intended to eliminate differences between the way that published industry data is presented and the way that the subject company’s data is presented in its financial statements.

Non-operating Adjustments. It is reasonable to assume that if a business were sold in a hypothetical sales transaction (which is the underlying premise of the fair market value standard), the seller would retain any assets which were not related to the production of earnings or price those non-operating assets separately. For this reason, non-operating assets (such as excess cash) are usually eliminated from the balance sheet.

Non-recurring Adjustments. The subject company’s financial statements may be affected by events that are not expected to recur, such as the purchase or sale of assets, a lawsuit, or an unusually large revenue or expense. These non-recurring items are adjusted so that the financial statements will better reflect the management’s expectations of future performance.

Discretionary Adjustments. The owners of private companies may be paid at variance from the market level of compensation that similar executives in the industry might command. In order to determine fair market value, the owner’s compensation, benefits, perquisites and distributions must be adjusted to industry standards. Similarly, the rent paid by the subject business for the use of property owned by the company’s owners individually may be scrutinized.

Income, asset and market approaches

Three different approaches are commonly used in business valuation: the income approach, the asset-based approach, and the market approach. Within each of these approaches, there are various techniques for determining the value of a business using the definition of value appropriate for the appraisal assignment. Generally, the income approaches determine value by calculating the net present value of the benefit stream generated by the business (discounted cash flow); the asset-based approaches determine value by adding the sum of the parts of the business (net asset value); and the market approaches determine value by comparing the subject company to other companies in the same industry, of the same size, and/or within the same region.

A number of business valuation models can be constructed that utilize various methods under the three business valuation approaches. Venture Capitalists and Private Equity professionals have long used the First chicago method which essentially combines the income approach with the market approach.

In determining which of these approaches to use, the valuation professional must exercise discretion. Each technique has advantages and drawbacks, which must be considered when applying those techniques to a particular subject company. Most treatises and court decisions encourage the valuator to consider more than one technique, which must be reconciled with each other to arrive at a value conclusion. A measure of common sense and a good grasp of mathematics is helpful.

Income approaches

The income approaches determine fair market value by multiplying the benefit stream generated by the subject or target company times a discount or capitalization rate. The discount or capitalization rate converts the stream of benefits into present value. There are several different income approaches, including capitalization of earnings or cash flows, discounted future cash flows (“DCF”), and the excess earnings method (which is a hybrid of asset and income apprope of benefit stream to which it is applied. The result of a value calculation under the income approach is generally the fair market value of a controlling, marketable interest in the subject company, since the entire benefit stream of the subject company is most often valued, and the capitalization and discount rates are derived from statistics concerning public companies.

Discount or capitalization rates

A discount rate or capitalization rate is used to determine the present value of the expected returns of a business. The discount rate and capitalization rate are closely related to each other, but distinguishable. Generally speaking, the discount rate or capitalization rate may be defined as the yield necessary to attract investors to a particular investment, given the risks associated with that investment.

In DCF valuations, the discount rate, often an estimate of the cost of capital for the business is used to calculate the net present value of a series of projected cash flows.

On the other hand, a capitalization rate is applied in methods of business valuation that are based on business data for a single period of time. For example, in real estate valuations for properties that generate cash flows, a capitalization rate may be applied to the net operating income (NOI) (i.e., income before depreciation and interest expenses) of the property for the trailing twelve months.

There are several different methods of determining the appropriate discount rates. The discount rate is composed of two elements: (1) the risk-free rate, which is the return that an investor would expect from a secure, practically risk-free investment, such as a high quality government bond; plus (2) a risk premium that compensates an investor for the relative level of risk associated with a particular investment in excess of the risk-free rate. Most importantly, the selected discount or capitalization rate must be consistent with stream of benefits to which it is to be applied.

Capital Asset Pricing Model (“CAPM”)

The Capital Asset Pricing Model (CAPM) is one method of determining the appropriate discount rate in business valuations. The CAPM method originated from the Nobel Prize winning studies of Harry Markowitz, James Tobin and William Sharpe. The CAPM method derives the discount rate by adding a risk premium to the risk-free rate. In this instance, however, the risk premium is derived by multiplying the equity risk premium times “beta,” which is a measure of stock price volatility. Beta is published by various sources for particular industries and companies. Beta is associated with the systematic risks of an investment.

One of the criticisms of the CAPM method is that beta is derived from the volatility of prices of publicly-traded companies, which are likely to differ from private companies in their capital structures, diversification of products and markets, access to credit markets, size, management depth, and many other respects. Where private companies can be shown to be sufficiently similar to public companies, however, the CAPM method may be appropriate.

[edit]Weighted average cost of capital (“WACC”)

The weighted average cost of capital is an approach to determining a discount rate. The WACC method determines the subject company’s actual cost of capital by calculating the weighted average of the company’s cost of debt and cost of equity. The WACC must be applied to the subject company’s net cash flow to total invested capital.

One of the problems with this method is that the valuator may elect to calculate WACC according to the subject company’s existing capital structure, the average industry capital structure, or the optimal capital structure. Such discretion detracts from the objectivity of this approach, in the minds of some critics.

Indeed, since the WACC captures the risk of the subject business itself, the existing or contemplated capital structures, rather than industry averages, are the appropriate choices for business valuation.

Once the capitalization rate or discount rate is determined, it must be applied to an appropriate economic income stream: pretax cash flow, aftertax cash flow, pretax net income, after tax net income, excess earnings, projected cash flow, etc. The result of this formula is the indicated value before discounts. Before moving on to calculate discounts, however, the valuation professional must consider the indicated value under the asset and market approaches.

Careful matching of the discount rate to the appropriate measure of economic income is critical to the accuracy of the business valuation results. Net cash flow is a frequent choice in professionally conducted business appraisals. The rationale behind this choice is that this earnings basis corresponds to the equity discount rate derived from the Build-Up or CAPM models: the returns obtained from investments in publicly traded companies can easily be represented in terms of net cash flows. At the same time, the discount rates are generally also derived from the public capital markets data.

[edit]Build-Up Method

The Build-Up Method is a widely-recognized method of determining the after-tax net cash flow discount rate, which in turn yields the capitalization rate. The figures used in the Build-Up Method are derived from various sources. This method is called a “build-up” method because it is the sum of risks associated with various classes of assets. It is based on the principle that investors would require a greater return on classes of assets that are more risky. The first element of a Build-Up capitalization rate is the risk-free rate, which is the rate of return for long-term government bonds. Investors who buy large-cap equity stocks, which are inherently more risky than long-term government bonds, require a greater return, so the next element of the Build-Up method is the equity risk premium. In determining a company’s value, the long-horizon equity risk premium is used because the Company’s life is assumed to be infinite. The sum of the risk-free rate and the equity risk premium yields the long-term average market rate of return on large public company stocks.

Similarly, investors who invest in small cap stocks, which are riskier than blue-chip stocks, require a greater return, called the “size premium.” Size premium data is generally available from two sources: Morningstar's (formerly Ibbotson & Associates') Stocks, Bonds, Bills & Inflation and Duff & Phelps' Risk Premium Report.

By adding the first three elements of a Build-Up discount rate, we can determine the rate of return that investors would require on their investments in small public company stocks. These three elements of the Build-Up discount rate are known collectively as the “systematic risks.”

In addition to systematic risks, the discount rate must include “unsystematic risks,” which fall into two categories. One of those categories is the “industry risk premium.” Morningstar’s yearbooks contain empirical data to quantify the risks associated with various industries, grouped by SIC industry code.

The other category of unsystematic risk is referred to as “specific company risk.” Historically, no published data has been available to quantify specific company risks. However as of late 2006, new ground-breaking research has been able to quantify, or isolate, this risk for publicly-traded stocks through the use of Total Beta calculations. P. Butler and K. Pinkerton have outlined a procedure, known as the Butler Pinkerton Model (BPM), using a modified Capital Asset Pricing Model (CAPM) to calculate the company specific risk premium. The model uses an equality between the standard CAPM which relies on the total beta on one side of the equation; and the firm's beta, size premium and company specific risk premium on the other. The equality is then solved for the company specific risk premium as the only unknown. The BPM is a relatively new concept and is gaining acceptance in the business valuation community. (BPM is a trademarked name for a model sold by a private for profit company. The model is a simplistic mathematical formula, easily replicated without the purchase of the model from the vendor. Therefore, attributing the model to BPM along with claims that BPM is "new ground breaking research" and "gaining acceptance" appears to be advertising hyperbole.)

It is important to understand why this capitalization rate for small, privately-held companies is significantly higher than the return that an investor might expect to receive from other common types of investments, such as money market accounts, mutual funds, or even real estate. Those investments involve substantially lower levels of risk than an investment in a closely-held company. Depository accounts are insured by the federal government (up to certain limits); mutual funds are composed of publicly-traded stocks, for which risk can be substantially minimized through portfolio diversification.

Closely-held companies, on the other hand, frequently fail for a variety of reasons too numerous to name. Examples of the risk can be witnessed in the storefronts on every Main Street in America. There are no federal guarantees. The risk of investing in a private company cannot be reduced through diversification, and most businesses do not own the type of hard assets that can ensure capital appreciation over time. This is why investors demand a much higher return on their investment in closely-held businesses; such investments are inherently much more risky. (This paragraph is biased, presuming that by the mere fact that a company is closely held, it is prone towards failure.)

Asset-based approaches

The value of asset-based analysis of a business is equal to the sum of its parts. That is the theory underlying the asset-based approaches to business valuation. The asset approach to business valuation is based on the principle of substitution: no rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility. In contrast to the income-based approaches, which require the valuation professional to make subjective judgments about capitalization or discount rates, the adjusted net book value method is relatively objective. Pursuant to accounting convention, most assets are reported on the books of the subject company at their acquisition value, net of depreciation where applicable. These values must be adjusted to fair market value wherever possible. The value of a company’s intangible assets, such as goodwill, is generally impossible to determine apart from the company’s overall enterprise value. For this reason, the asset-based approach is not the most probative method of determining the value of going business concerns. In these cases, the asset-based approach yields a result that is probably lesser than the fair market value of the business. In considering an asset-based approach, the valuation professional must consider whether the shareholder whose interest is being valued would have any authority to access the value of the assets directly. Shareholders own shares in a corporation, but not its assets, which are owned by the corporation. A controlling shareholder may have the authority to direct the corporation to sell all or part of the assets it owns and to distribute the proceeds to the shareholder(s). The non-controlling shareholder, however, lacks this authority and cannot access the value of the assets. As a result, the value of a corporation's assets is rarely the most relevant indicator of value to a shareholder who cannot avail himself of that value. Adjusted net book value may be the most relevant standard of value where liquidation is imminent or ongoing; where a company earnings or cash flow are nominal, negative or worth less than its assets; or where net book value is standard in the industry in which the company operates. None of these situations applies to the Company which is the subject of this valuation report. However, the adjusted net book value may be used as a “sanity check” when compared to other methods of valuation, such as the income and market approaches.

Market approaches

The market approach to business valuation is rooted in the economic principle of competition: that in a free market the supply and demand forces will drive the price of business assets to a certain equilibrium. Buyers would not pay more for the business, and the sellers will not accept less, than the price of a comparable business enterprise. It is similar in many respects to the “comparable sales” method that is commonly used in real estate appraisal. The market price of the stocks of publicly traded companies engaged in the same or a similar line of business, whose shares are actively traded in a free and open market, can be a valid indicator of value when the transactions in which stocks are traded are sufficiently similar to permit meaningful comparison.

The difficulty lies in identifying public companies that are sufficiently comparable to the subject company for this purpose. Also, as for a private company, the equity is less liquid (in other words its stocks are less easy to buy or sell) than for a public company, its value is considered to be slightly lower than such a market-based valuation would give.

Guideline Public Company method

The Guideline Public Company method entails a comparison of the subject company to publicly traded companies. The comparison is generally based on published data regarding the public companies’ stock price and earnings, sales, or revenues, which is expressed as a fraction known as a “multiple.” If the guideline public companies are sufficiently similar to each other and the subject company to permit a meaningful comparison, then their multiples should be similar. The public companies identified for comparison purposes should be similar to the subject company in terms of industry, product lines, market, growth, margins and risk.

Guideline Transaction Method or Direct Market Data Method

Using this method, the valuation analyst may determine market multiples by reviewing published data regarding actual transactions involving either minority or controlling interests in either publicly traded or closely held companies. In judging whether a reasonable basis for comparison exists, the valuation analysis must consider: (1) the similarity of qualitative and quantitative investment and investor characteristics; (2) the extent to which reliable data is known about the transactions in which interests in the guideline companies were bought and sold; and (3) whether or not the price paid for the guideline companies was in an arms-length transaction, or a forced or distressed sale. In regards to data reliability and both the guideline transaction method and the direct market data method, unlike real estate sales data, sales of privately held companies are neither actively traded or regularly reported to city or county recording offices, nor verified by these same local government offices. Sales of privately held companies are voluntarily reported by business brokers to data re-sellers or unscientifically accumulated by these same private, for profit data re-sellers. Consequently the data is considered, by the very nature of the data collection process, to be corrupted by sampling bias and nonsampling error, and of questionable reliability.

Discounts and premiums

The valuation approaches yield the fair market value of the Company as a whole. In valuing a minority, non-controlling interest in a business, however, the valuation professional must consider the applicability of discounts that affect such interests. Discussions of discounts and premiums frequently begin with a review of the “levels of value.” There are three common levels of value: controlling interest, marketable minority, and non-marketable minority. The intermediate level, marketable minority interest, is lesser than the controlling interest level and higher than the non-marketable minority interest level. The marketable minority interest level represents the perceived value of equity interests that are freely traded without any restrictions. These interests are generally traded on the New York Stock Exchange, AMEX, NASDAQ, and other exchanges where there is a ready market for equity securities. These values represent a minority interest in the subject companies – small blocks of stock that represent less than 50% of the company’s equity, and usually much less than 50%. Controlling interest level is the value that an investor would be willing to pay to acquire more than 50% of a company’s stock, thereby gaining the attendant prerogatives of control. Some of the prerogatives of control include: electing directors, hiring and firing the company’s management and determining their compensation; declaring dividends and distributions, determining the company’s strategy and line of business, and acquiring, selling or liquidating the business. This level of value generally contains a control premium over the intermediate level of value, which typically ranges from 25% to 50%. An additional premium may be paid by strategic investors who are motivated by synergistic motives. Non-marketable, minority level is the lowest level on the chart, representing the level at which non-controlling equity interests in private companies are generally valued or traded. This level of value is discounted because no ready market exists in which to purchase or sell interests. Private companies are less “liquid” than publicly-traded companies, and transactions in private companies take longer and are more uncertain. Between the intermediate and lowest levels of the chart, there are restricted shares of publicly-traded companies. Despite a growing inclination of the IRS and Tax Courts to challenge valuation discounts , Shannon Pratt suggested in a scholarly presentation recently that valuation discounts are actually increasing as the differences between public and private companies is widening . Publicly-traded stocks have grown more liquid in the past decade due to rapid electronic trading, reduced commissions, and governmental deregulation. These developments have not improved the liquidity of interests in private companies, however. Valuation discounts are multiplicative, so they must be considered in order. Control premiums and their inverse, minority interest discounts, are considered before marketability discounts are applied.

Discount for lack of control

The first discount that must be considered is the discount for lack of control, which in this instance is also a minority interest discount. Minority interest discounts are the inverse of control premiums, to which the following mathematical relationship exists: MID = 1 – [1 / (1 + CP)] The most common source of data regarding control premiums is the Control Premium Study, published annually by Mergerstat since 1972. Mergerstat compiles data regarding publicly announced mergers, acquisitions and divestitures involving 10% or more of the equity interests in public companies, where the purchase price is $1 million or more and at least one of the parties to the transaction is a U.S. entity. Mergerstat defines the “control premium” as the percentage difference between the acquisition price and the share price of the freely-traded public shares five days prior to the announcement of the M&A transaction. While it is not without valid criticism, Mergerstat control premium data (and the minority interest discount derived therefrom) is widely accepted within the valuation profession.

Discount for lack of marketability

Another factor to be considered in valuing closely held companies is the marketability of an interest in such businesses. Marketability is defined as the ability to convert the business interest into cash quickly, with minimum transaction and administrative costs, and with a high degree of certainty as to the amount of net proceeds. There is usually a cost and a time lag associated with locating interested and capable buyers of interests in privately-held companies, because there is no established market of readily-available buyers and sellers. All other factors being equal, an interest in a publicly traded company is worth more because it is readily marketable. Conversely, an interest in a private-held company is worth less because no established market exists. The IRS Valuation Guide for Income, Estate and Gift Taxes, Valuation Training for Appeals Officers acknowledges the relationship between value and marketability, stating: “Investors prefer an asset which is easy to sell, that is, liquid.” The discount for lack of control is separate and distinguishable from the discount for lack of marketability. It is the valuation professional’s task to quantify the lack of marketability of an interest in a privately-held company. Because, in this case, the subject interest is not a controlling interest in the Company, and the owner of that interest cannot compel liquidation to convert the subject interest to cash quickly, and no established market exists on which that interest could be sold, the discount for lack of marketability is appropriate. Several empirical studies have been published that attempt to quantify the discount for lack of marketability. These studies include the restricted stock studies and the pre-IPO studies. The aggregate of these studies indicate average discounts of 35% and 50%, respectively. Some experts believe the Lack of Control and Marketability discounts can aggregate discounts for as much as ninety percent of a Company's fair market value, specifically with family-owned companies.

Restricted stock studies

Restricted stocks are equity securities of public companies that are similar in all respects to the freely traded stocks of those companies except that they carry a restriction that prevents them from being traded on the open market for a certain period of time, which is usually one year (two years prior to 1990). This restriction from active trading, which amounts to a lack of marketability, is the only distinction between the restricted stock and its freely-traded counterpart. Restricted stock can be traded in private transactions and usually do so at a discount. The restricted stock studies attempt to verify the difference in price at which the restricted shares trade versus the price at which the same unrestricted securities trade in the open market as of the same date. The underlying data by which these studies arrived at their conclusions has not been made public. Consequently, it is not possible when valuing a particular company to compare the characteristics of that company to the study data. Still, the existence of a marketability discount has been recognized by valuation professionals and the Courts, and the restricted stock studies are frequently cited as empirical evidence. Notably, the lowest average discount reported by these studies was 26% and the highest average discount was 45%.

Option pricing

In addition to the restricted stock studies, U.S. publicly traded companies are able to sell stock to offshore investors (SEC Regulation S, enacted in 1990) without registering the shares with the Securities and Exchange Commission. The offshore buyers may resell these shares in the United States, still without having to register the shares, after holding them for just 40 days. Typically, these shares are sold for 20% to 30% below the publicly traded share price. Some of these transactions have been reported with discounts of more than 30%, resulting from the lack of marketability. These discounts are similar to the marketability discounts inferred from the restricted and pre-IPO studies, despite the holding period being just 40 days. Studies based on the prices paid for options have also confirmed similar discounts. If one holds restricted stock and purchases an option to sell that stock at the market price (a put), the holder has, in effect, purchased marketability for the shares. The price of the put is equal to the marketability discount. The range of marketability discounts derived by this study was 32% to 49%. However, ascribing the entire value of a put option to marketability is misleading, because the primary source of put value comes from the downside price protection. A correct economic analysis would use deeply in-the-money puts or Single-stock futures, demonstrating that marketability of restricted stock is of low value because it is easy to hedge using unrestricted stock or futures trades.

Pre-IPO studies

Another approach to measure the marketability discount is to compare the prices of stock offered in initial public offerings (IPOs) to transactions in the same company’s stocks prior to the IPO. Companies that are going public are required to disclose all transactions in their stocks for a period of three years prior to the IPO. The pre-IPO studies are the leading alternative to the restricted stock stocks in quantifying the marketability discount. The pre-IPO studies are sometimes criticized because the sample size is relatively small, the pre-IPO transactions may not be arm’s length, and the financial structure and product lines of the studied companies may have changed during the three year pre-IPO window.

Applying the studies

The studies confirm what the marketplace knows intuitively: Investors covet liquidity and loathe obstacles that impair liquidity. Prudent investors buy illiquid investments only when there is a sufficient discount in the price to increase the rate of return to a level which brings risk-reward back into balance. The referenced studies establish a reasonable range of valuation discounts from the mid-30%s to the low 50%s. The more recent studies appeared to yield a more conservative range of discounts than older studies, which may have suffered from smaller sample sizes. Another method of quantifying the lack of marketability discount is the Quantifying Marketability Discounts Model (QMDM).

Estimates of business value

The evidence on the market value of specific businesses varies widely, largely depending on reported market transactions in the equity of the firm. A fraction of businesses are "publicly traded," meaning that their equity can be purchased and sold by investors in stock markets available to the general public. Publicly-traded companies on major stock markets have an easily-calculated "market capitalization" that is a direct estimate of the market value of the firm's equity. Some publicly-traded firms have relatively few recorded trades (including many firms traded "over the counter" or in "pink sheets"). A far larger number of firms are privately held. Normally, equity interests in these firms (which include corporations, partnerships, limited-liability companies, and some other organizational forms) are traded privately, and often irregularly.

A number of stock market indicators in the United States and other countries provide an indication of the market value of publicly-traded firms. The Survey of Consumer Finance in the US also includes an estimate of household ownership of stocks, including indirect ownership through mutual funds. The 2004 and 2007 SCF indicate a growing trend in stock ownership, with 51% of households indicating a direct or indirect ownership of stocks, with the majority of those respondents indicating indirect ownership through mutual funds. Few indications are available on the value of privately-held firms. Anderson (2009) recently estimated the market value of U.S. privately-held and publicly-traded firms, using Internal Revenue Service and SCF data.He estimates that privately-held firms produced more income for investors, and had more value than publicly-held firms, in 2004.

(source:wikipedia)

Fundamental analysis

Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis.

Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:

to conduct a company stock valuation and predict its probable price evolution,

to make a projection on its business performance,

to evaluate its management and make internal business decisions,

to calculate its credit risk.

Two analytical models

When the objective of the analysis is to determine what stock to buy and at what price, there are two basic methodologies

Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security.

Technical analysis maintains that all information is reflected already in the stock price. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.

Investors can use any or all of these different but somewhat complementary methods for stock picking. For example many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies.

The choice of stock analysis is determined by the investor's belief in the different paradigms for "how the stock market works". See the discussions at efficient-market hypothesis, random walk hypothesis, capital asset pricing model, Fed model Theory of Equity Valuation, Market-based valuation, and Behavioral finance.

Fundamental analysis includes:

Economic analysis

Industry analysis

Company analysis

On the basis of these three analyses the intrinsic value of the shares are determined. This is considered as the true value of the share. If the intrinsic value is higher than the market price it is recommended to buy the share . If it is equal to market price hold the share and if it is less than the market price sell the shares.

Use by different portfolio styles

Investors may use fundamental analysis within different portfolio management styles.

Buy and hold investors believe that latching onto good businesses allows the investor's asset to grow with the business. Fundamental analysis lets them find 'good' companies, so they lower their risk and probability of wipe-out.

Managers may use fundamental analysis to correctly value 'good' and 'bad' companies. Eventually 'bad' companies' stock goes up and down, creating opportunities for profits.

Managers may also consider the economic cycle in determining whether conditions are 'right' to buy fundamentally suitable companies.

Contrarian investors distinguish "in the short run, the market is a voting machine, not a weighing machine". Fundamental analysis allows you to make your own decision on value, and ignore the market.

Value investors restrict their attention to under-valued companies, believing that 'it's hard to fall out of a ditch'. The value comes from fundamental analysis.

Managers may use fundamental analysis to determine future growth rates for buying high priced growth stocks.

Managers may also include fundamental factors along with technical factors into computer models (quantitative analysis).

Top-down and bottom-up

Investors can use either a top-down or bottom-up approach.

The top-down investor starts his analysis with global economics, including both international and national economic indicators, such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices. He narrows his search down to regional/industry analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then he narrows his search to the best business in that area.

The bottom-up investor starts with specific businesses, regardless of their industry/region.

Procedures

The analysis of a business' health starts with financial statement analysis that includes ratios. It looks at dividends paid, operating cash flow, new equity issues and capital financing. The earnings estimates and growth rate projections published widely by Thomson Reuters and others can be considered either 'fundamental' (they are facts) or 'technical' (they are investor sentiment) based on your perception of their validity.

The determined growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation models. The foremost is the discounted cash flow model, which calculates the present value of the future

dividends received by the investor, along with the eventual sale price. (Gordon model)

earnings of the company, or

cash flows of the company.

The amount of debt is also a major consideration in determining a company's health. It can be quickly assessed using the debt to equity ratio and the current ratio (current assets/current liabilities).

The simple model commonly used is the Price/Earnings ratio. Implicit in this model of a perpetual annuity (Time value of money) is that the 'flip' of the P/E is the discount rate appropriate to the risk of the business. The multiple accepted is adjusted for expected growth (that is not built into the model).

Growth estimates are incorporated into the PEG ratio, but the math does not hold up to analysis.[citation needed] Its validity depends on the length of time you think the growth will continue. IGAR models can be used to impute expected changes in growth from current P/E and historical growth rates for the stocks relative to a comparison index.

Computer modelling of stock prices has now replaced much of the subjective interpretation of fundamental data (along with technical data) in the industry. Since about year 2000, with the power of computers to crunch vast quantities of data, a new career has been invented. At some funds (called Quant Funds) the manager's decisions have been replaced by proprietary mathematical models.

Criticisms

Economists such as Burton Malkiel suggest that neither fundamental analysis nor technical analysis is useful in outperforming the markets.

(source;wikipedia)

Government revenue

Government revenue is revenue received by a government. Its opposite is government spending. Government revenue is an important part of fiscal policy.

Revenue may be from various taxes or non-tax revenue (such as revenue from government-owned corporations or sovereign wealth funds).

Revenue Collections for December Up over Last Year

Gov. Bob McDonnell announced Thursday that December revenue collections increased by 9.5 percent over the prior year when adjusted for the December 2009 one-time tax amnesty program.

This is the ninth month out of the last ten in which state revenue collections exceeded the previous year’s amount. It is the second month in a row in which year over year revenue growth was greater than nine percent.

The revenue increase was primarily driven by withholding (+3.9 percent), corporate income (+3.4 percent) and sales tax (+8.6 percent - adjusted for tax amnesty) collections. Adjusted for the accelerated sales tax program, total state revenues grew 4.1 percent through December, slightly lagging the economic-base forecast of 5.2 percent growth.

Because a number of factors can influence the flow of payments and monthly growth rates this time of the year, December and January receipts must be considered together to get a clearer picture of revenue growth.

Speaking about the latest revenue report, McDonnell notes, “In a tough economy we are beginning to see real signs of progress and recovery. We have added 67,900 net new jobs in the Commonwealth since last February, the third greatest amount nationally.

"We have just posted two months of back to back nine-percent revenue growth, in the midst of a string of nine out of the last ten months featuring increases in state revenue. These are positive demonstrations of economic progress.

"However, this is still a difficult and uncertain economy. Over 280,000 Virginians are still unemployed. Clearly there is much more work to be done before all Virginians can find the good work they deserve. That is why we are focused this session of the General Assembly on utilizing savings and reprioritizations in our state budget to invest in job-creating core functions of government like higher education, economic development, transportation and government reform.

"Progress is being made, but we still have a long ways to go before economic prosperity and vitality have truly returned to every corner of the Commonwealth.”

Weight loss

Weight loss, in the context of medicine, health or physical fitness, is a reduction of the total body mass, due to a mean loss of fluid, body fat or adipose tissue and/or lean mass, namely bone mineral deposits, muscle, tendon and other connective tissue. It can occur unintentionally due to an underlying disease or can arise from a conscious effort to improve an actual or perceived overweight or obese state.

Unintentional weight loss

Unintentional weight loss occurs in many diseases and conditions, including some very serious diseases such as cancer, AIDS, and a variety of other diseases.

Poor management of type 1 diabetes mellitus, also known as insulin-dependent diabetes mellitus (IDDM), leads to an excessive amount of glucose and an insufficient amount of insulin in the bloodstream. This triggers the release of triglycerides from adipose (fat) tissue and catabolism (breakdown) of amino acids in muscle tissue. This results in a loss of both fat and lean mass, leading to a significant reduction in total body weight. Note that untreated type 1 diabetes mellitus will usually not produce weight loss, as these patients get acutely ill before they have time to lose weight.

In addition to weight loss due to a reduction in fat and lean mass, illnesses such as diabetes, certain medications, lack of fluid intake and other factors can trigger fluid loss. Fluid loss in addition to reduction in fat and lean mass exacerbates the risk for cachexia.

Infections such as HIV may alter metabolism, leading to weight loss.

Hormonal disruptions, such as an overactive thyroid (hyperthyroidism), may also exhibit as weight loss.

Recent research has shown fidgeting to result in significant weight loss.

Causes of unintentional weight loss

Starvation, a state of extreme hunger resulting from lack of essential nutrients over a prolonged period.

Cancer, a very common and sometimes fatal cause of unexplained (idiopathic) weight loss. About one-third of unintentional weight loss cases are secondary to malignancy. Cancers to suspect in patients with unexplained weight loss include gastrointestinal, prostate, hepatobillary (hepatocellular carcinoma, pancreatic cancer), ovarian, hematologic or lung malignancies should be considered in any patient presenting with unexplained weight loss.

AIDS can cause weight loss and should be suspected in high-risk individuals presenting with weight loss.

Gastrointestinal disorders are another common cause of unexplained weight loss - in fact they are the most common non-cancerous cause of idiopathic weight loss. Possible gastrointestinal etiologies of unexplained weight loss are celiac disease, a fairly common and well-known disease caused by intolerance of gluten, peptic ulcer, inflammatory bowel disease (crohns disease and ulcerative colitis), pancreatitis, gastritis, diarrhea and many other GI conditions can cause weight loss.

Infection. Some infectious diseases can cause weight loss. These include fungal illness, endocarditis, many parasitic diseases, AIDS, and some other sub-acute or occult infections may cause weight loss.

Renal disease. Patients who have uremia often have poor or absent appetite, emesis and nausea. This can cause weight loss.

Cardiac disease. Cardiovascular disease, especially congestive heart failure, may cause unexplained weight loss.

Pulmonary disease.

Connective tissue disease

Neurologic disease, including dementia

Intentional weight loss

Intentional weight loss refers to the loss of total body mass in an effort to improve fitness and health, and to change appearance.

Therapeutic weight loss, in individuals who are overweight or obese, can decrease the likelihood of developing diseases such as diabetes, heart disease, high blood pressure, stroke, osteoarthritis, and certain types of cancer.

Attention to diet in particular can be beneficial in reducing the impact of diabetes and other health risks of an overweight or obese individual.

Weight loss occurs when an individual is in a state of negative energy balance: when the body is exerting more energy (i.e. in work and metabolism) than it is consuming (i.e. from food or other nutritional supplements), it will use stored reserves from fat or muscle, gradually leading to weight loss.

It is not uncommon for some people who are currently at their ideal body weight to seek additional weight loss in order to improve athletic performance, and/or meet required weight classification for participation in a sport. However, others may be driven by achieving a more attractive body image. Notably, being underweight is associated with health risks such as difficulty fighting off infection, osteoporosis, decreased muscle strength, trouble regulating body temperature and even increased risk of death.

There are many diet plans and recipes that can be helpful for weight loss. While some are classified as unhealthy and potentially harmful to one's general health, others are recommended by specialists. Diet plans are generally designed according to the recommended caloric intake but it is important to note that the most successful diets are those that simultaneously promote physical activity. There are many dietary programs that claim to be efficient in helping overweight individuals to lose weight with no effort. However, the long-term efficacy of these plans is questionable.

Intentional weight loss is, in most cases, achieved with the help of diets since dietary restriction is generally more manageable than making a significant change in one's lifestyle (although weight loss is generally associated with some degree of change in lifestyle habits) or beginning to practice a sport. In that regard, a wide variety of dietary strategies have been designed to meet the needs of individuals seeking to lose excess weight. Calorie-restriction strategies are one of the most common dietary plans. Notably, daily calorie consumption for dietary purposes vary depending on a number of factors including, age, gender, weight loss goals, and many more. For instance, nutritionists suggest that a minimum of 1,200 daily calories should be consumed by women in order to maintain health. The daily calorie consumption by men, on the other hand, could approach 1,500. It is important to note that these recommendations primarily target relatively healthy individuals who seek weight loss for a better body tonus. However, individuals whose obesity places them at an increased risk for diabetes, heart disease, or other conditions, may follow a more strict diet, but only under the close monitoring of a physician and/or specialist. In some cases, obese individuals may need to restrict their daily calorie intake to 800 or even 500.According to the FDA, healthy individuals seeking to maintain their weight, should consume 2,000 calories per day.

Low-calorie regimen diets are also referred to as balanced diets. Due to their minimal detrimental effects, these types of diets are most commonly recommended by nutritionists. In addition to restricting calorie intake, a balanced diet also regulates macronutrient consumption. Therefore, from the total number of allotted daily calories, 55% should come from carbohydrates, 15% from protein, and 30% from fats with no more than 10% of total fat coming from saturated forms. For instance, a 1,200 calorie diet would consist of no more than 660 calories from carbohydrates, 180 from protein, and 360 from fat. Although counting calories seems difficult altogether, the long term benefits of calorie restriction are many. After reaching the desired body weight, the amount of calories consumed per day may be increased gradually, without exceeding 2,000 net (i.e. derived by subtracting calories burned by physical activity from calories consumed). Combined with increased physical activity, low-calorie diets are thought to be most effective long term, unlike crash diets which can achieve short term results, at best. Physical activity could greatly enhance the efficiency of a diet. The healthiest weight loss regimen, therefore, is one that consists of a balanced diet and moderate physical activity.

The golden rule in weight loss is to avoid foods that are high in fats and sugars, both of which contribute to increased body mass and are detrimental to the overall health. Further, weight gain has been associated with excessive alcohol consumption.  Depression, stress or boredom may also contribute to weight increase,  and in these cases, individuals are advised to seek medical help. A 2010 study found that dieters who got a full night's sleep more than doubled the amount of fat lost compared to sleep-deprived dieters.

Therapeutic weight loss techniques

See also: Obesity#Management and Bariatrics

The least intrusive weight loss methods, and those most often recommended, are adjustments to eating patterns and increased physical activity, generally in the form of exercise. Physicians will usually recommend that their overweight patients combine a reduction of processed foods and caloric content of the diet with an increase in physical activity.

An increase in fiber intake is also recommended for regulating bowel movements.

Other methods of weight loss include use of drugs and supplements that decrease appetite, block fat absorption, or reduce stomach volume. Application of such medications, however, should only be performed under the strict supervision of a physician and/or specialist.

Weight Loss Coaching is rapidly growing in popularity in the United States, with the number of available coaches nearly doubling since 2000. Finally, surgery (i.e. bariatric surgery) may be used in more severe cases to artificially reduce the size of the stomach, thus limiting the intake of food energy.

Dietary supplements, though widely used, are not considered a healthy option for weight loss. Even though a wide array of these products is available to the public, very few are effective long term.

Bariatric surgery is usually considered a last resort in treating severe obesity and it consists of two main procedures: gastric bypass and gastric banding.

Crash dieting

A crash diet refers to willful nutritional restriction (except water) for more than 12 waking hours. The desired result is to have the body burn fat for energy with the goal of losing a significant amount of weight in a short time. There is a possibility of muscle loss, depending on the approach used. Crash dieting can be dangerous to health and this method of weight loss is not recommended by medical doctors.

Crash dieting is not the same as intermittent fasting, in which the individual periodically abstains from food (e.g., every other day).

Weight loss industry

There is a substantial market for products which promise to make weight loss easier, quicker, cheaper, more reliable, or less painful. These include books, CDs, cremes, lotions, pills, rings and earrings, body wraps, body belts and other materials, not to mention fitness centers, personal coaches, weight loss groups, and food products and supplements. US residents in 1992 spent an estimated $30 billion a year on all types of diet programs and products, including diet foods and drinks.

Between $33 billion and $55 billion is spent annually on weight loss products and services, including medical procedures and pharmaceuticals, with weight loss centers garnering between 6 percent and 12 percent of total annual expenditure. About 70 percent of Americans' dieting attempts are of a self-help nature. Although often short-lived, these diet fads are a positive trend for this sector as Americans ultimately turn to professionals to help them meet their weight loss goals.

In Western Europe, sales of weight-loss products, excluding prescription medications, topped £900 million ($1.4 billion) in 2009.

(source:wikipedia)

Is Walmart Open on Christmas 2010

Walmart Open on Chzistmas 2010

After the early morning Christmas festivities many people all over the world are wondering what stores will be open Christmas Day. To answer your question is Walmart open on Christmas 2010, the answer is no. Walmart will re-open on December 26th, some reports say as early as 6am.

Keep reading after the jump to find out more info and some really great after Christmas Sales from Walmart!

Where is Santa Right Now? Track His Current Location on the Internet, Your Phone, or Twitter!POSTED BY LMAYES ON DECEMBER 24TH, 2010 AT 5:00 PM


See also
NOARD tracks Santa
North american aerospace defense

Cyberstalking will take an entirely new meaning tonight as millions around the world track one red-suited man…Santa. Where is he? When will he be at my house? Find out here! We’ll be stalking him…I mean, tracking him…all day!

Keep reading to find out where Santa is right this second… and the many ways you can track Santa!

Is there mail on Christmas Eve 2010? It is so hard to believe that Christmas Eve is here. Most Post Offices will be open on Christmas Eve, December 24, but will shorten retail lobby hours and close at 12:00 noon. If you are needing to send something today after 12:00 noon you should contact your local post office for information on locations of post offices.

Where is Santa Claus right now? There is an official Santa Claus Tracker 2010. You can now ask Norad to help you find out Santa’s current location. How exciting! Each year on December 24th, Santa and his reindeer launch from the North Pole very early in the morning for their widely known trip around the world. The minute they launch, Norad starts to track him!

In 1958, the governments of the United States & Canada created a bi-national air defense command for North America called the North American Aerospace Defense Command, also known as NORAD, which then took on the tradition of tracking Santa.

With all of the questions about Santa Claus including how does Santa fit down a chimney to how does Santa’s sleigh make it around the world in one day…NORAD has the answers for you!

Keep reading after the jump to find out more info about Norad Santa Tracker 2010, and view a video of where Santa has Landed!

Are you looking to find out the whereabouts of Santa? Well look no further than the Norad Santa Tracker! Thanks to Continental Air Defense Command (CONAD) and Google, you can now track Santa around the world! Norad Santa Tracker uses four high-tech systems to track Santa – radar, satellites, Santa Cams and fighter jets. On December 24th, you can send an email to a Norad staff member and they will give you Santa’s last known location. You can also follow Norad Santa on twitter to find out up to date info. What a fun Holiday tradi|ion with the family!

Keep reading after the jump to find out more about Norad Santa Tracker, their website and email info. Also track Santa on Google Earth!

These posters by Blue Day Designs are so bold. Parents send in their favorite photos and Emma converts them into bold, graphic images. They come in big sizes and teeny tiny sizes too (see a mini example below).

The big ones would be neat in a playroom or bedroom. And the mini ones would be cute tucked on a bookshelf. Or maybe you could have a whole series done for your family and line them up down a hallway.

“It’s Festivus for the Rest of Us!” (In our best Frank Costanza impression.)

Today, December 23, is better known as Festivus — a holiday made up by Frank Costanza (Jerry Stiller) on the wildly popular sitcom Seinfeld. Frustrated with the commercial aspect of Christmas, the Costanzas created a tradition that involves an aluminum pole, telling your family exactly what you think and a friendly physical brawl. Instead of being a passing joke, the classic episode has become such a part of pop culture that it’s increasingly been recognized as an actual holiday. A funny holiday, sure, but one to be celebrated.

So whether you’re putting up an aluminum Festivus Pole, having an Airing of Grievances with your family or actually participating in a Feats of Strength wrestling competition with your aging father, we put together some real gift and decoration ideas to celebrate Festivus!

Also check out the hilarious Story of Festivus video, below, for those unfamiliar with the holiday — or those in need of a good laugh:

Giving us one more Holiday to celebrate during the Holidays, today “Seinfeld” fans around the world are gathering around an aluminum Festivus Pole and airing their grievances by telling others how they disappointed them in the last 12 months. You read that right.

So here’s your one-stop-shop (without the shopping) for all things Festivus! Because honestly, why not?

Keep reading to find out more about this new, invented Holiday, and how you can celebrate….

Up on the Housetop was chosen as google’s new doodle. Google chose 17 holiday portraits from across the globe. Each individual scene creates a set together to paint an overall approximation of the logo. What a great way to start off the Christmas season! Up on the Housetop was my favorite’s of the holiday portraits!

Google kicked off the holiday season with this new doodle, what are ways that you will celebrate Christmas this year with your family?

Keep reading after the jump to find out what 16 other holiday portraits were featured in google’s new logo!

By now, all the shopping and ordering for Christmas is probably just about complete and it’s time to move onto wrapping that stack of boxes and bags you’ve been cleverly hiding in the closet for weeks now. Gift toppers are a really fun way to make fun statement and add a personal touch to your gifts. We’ve collected our top 5 favorite gift toppers you can make yourself. Most are from objects like paper and yarn that you already have around the house.

Keep reading to find out about these cute cupcake toppers featured above and the rest of our top 5!

(source:babble.com)