Some Questions from Equity

1.) Suppose you are valuing a company XYZ Inc. You have valued like this value based on going concern basis = A value based on liquidation basis = B Value based on fairvalue basis = C Whats relationship between A , B and C. Is it A > B > C ? Reference : Page no 19 - book 4- schweser 2.)Whats difference between discounts for lack of marketability and discounts for lack of liquidity ? Is there any clear difference ? to me both appeaers same. Page No 20 3.)what exist in real life ? both price driven market and order driven market are same ? IS it the case that it depends on how you see the system ? Also its given that NYSE is combination of order driven market and price driven market. then how does it gets decided that for which stock it will be order driven market and for which stock it will be price driven market. Is it the case that in some cases both exist simultanously ? page no 29-30 4.)Components of execution cost : Why is market impact cost and oppertunity cost different ? according to me both should be same and only one should be counted/included ? page no 33 6.) equity risk premium predicted by constant growth model and Macroeconomic model appears to move in different direction ? Dont you people think it should move in same direction ? in constant growth model in boom premium less… in bust premium more but in Macroeconomic model in boom eexpected real growth in GDP is more then in bust so premium will be more in boom page no 52-53

no answer ?

I will take a stab 1)A>C>B 2)Marketability is related to non-public company, liquidity is thinly traded stocks 3)As for Order driven vs. Price, just know that Order driven have points in time when all orders are settled, where as price is a continuous price 4) Market impact is you actually doing the trade for 1 million shares…it drives up the prices as you clear through all the outstanding sell orders out there. Opportunity Cost is if you didn’t do the trade, say you waited two minutes and the price jumps from 30 to 31 per share, you lose out on that dollar due to your hesitation. What happened to 5 6)gonna skip this one for now.

1)A>C>B 2)Marketability is if there are any buyers out there for what you have, liquidity is how quickly you can turn your investment to cash. 3)both exist. As it states, the Nikkei is order driven, the Nasdaq is price driven. 4)Mkt impact: you dump 100000 shares of a microcap company, that is going to drag the price down, meaning a larger mkt impact. Opportunity cost is what happens if the trade is delayed, what did you lose out on because it couldnt be done timely. 6)ERP: In good times, int rates (RFR) can go up, so the ERP=Mkt Return-RFR is lower. In bad times, lets say now, RFR is almost nada, so the ERP is higher. These are not right probably, but hey they make a bit of sense to me. There is a formula for a Macroeconomic ERP that probably answers #6 better in the material somewhere…

what does “Value based on fairvalue basis” mean? fair (market) value can be estimated on a going-concern or liquidation basis. one is a standard of value, the other one is a premise which you use to apply the standard. it’s not just a semantic difference

The way I see it, going concern basis is a “mark-to-market” valuation of a company on a daily basis and can be different from its fundamental or “fair” value. Liquidation basis is the value of a company without any prospects of future cash flows, and can be based on book value, or other net-asset value approach. And fair value of a company is based on the fundamental value of the firm based on either a discount cash flow and/or multiple approach plus any control premium (if acquring a controlling stake). So therefore, I see Fair Value > Going Concern Value > Liquidation Value if company is currently trading below fair value), and Going Concern Value > Fair Value > Liquidation Value if company is currently trading above its fair value.