Advanced Valuation Topics Flashcards
In the MM world, the characteristic of rA is that?
It does not change regardless of leverage ratio.
What is the enterprise value?
NWC+LTA, basically D+E-cash
Why does the enterprise value exclude cash?
Because cash does not represent what the firm DOES.
How to define excess cash?
Look at what other companies in the same business is doing, how they define their various operations. Difficult question, use business judgement.
What happens to firm beta when you not include excess cash?
The firm beta will increase.
What is the definition of net debt?
Defined as D-excess cash.
For WACC to work need:
- Constant Debt ratio. Requires debt to be rebalanced (check WACC further comments slides)
Why is tax term in unlevelered rate formula disregarded?
Because the assumption of the formula is that the D/E ratio stays constant. Only add in tax term when calculating WACC from rD and rE.
How to discount APV?
If D/V constant, then discount by rU. If D is constant, then discount by rD
