Chapter 5

Question 1

Consumption is determined by the following factors:

Answer 1

• general level of job creation (which determines the level of disposible income)
• wealth
• expectations
• consumer debt
• taxes

Question 2

Private investment is influenced by the following factors:

Answer 2

• the real interest rate (cost to borrow)
• expectations of real net profits
• taxes
• technological changes

Question 3

Government spending is influenced by the following factors:

Answer 3

-political considerations

Question 4

When a government spends in order to influence demand it is called fiscal policy and is financed in 3 ways:

Answer 4

1. Taxation
2. Borrowing
3. Printing money

Question 5

Net exports are determined by the following factors:

Answer 5

• level of domestic GDP
• foreign incomes
• tariffs
• exchange rates

Question 6

Describe loose vs tight monetary policy

Answer 6

• loose monetary policy increases aggregate demand

- tight monetary policy decreases it

Question 7

What the two situations in which a consensus forecast comes into play:

Answer 7

1. Providing an average view of the major economic variables used in making investment and business decisions
2. Positioning markets ahead of key economic releases

Question 8

What is the most closely watched economic indicator?

Answer 8

Monthly US payrolls report

Question 9

While a yield curve inversion generally occurs before a recession, it can also occur for reasons other than declining economic growth such as:

Answer 9

1. Low inflation expectations, which flatten the yields of longer-dated securities
2. Large purchases of US treasuries, notably in the longer maturities, by foreign central banks
3. Pension and hedge fund purchases, as pension funds buy longer dated bonds to match long dated liabilities and hedge funds use long treasuries to execute trading strategies

Question 10

The degree and duration of a competitive advantage depend on what three factors?

Answer 10

1. Low costs
2. Differentiation
3. Focus (narrow, underserved customer base)

Question 11

To determine a firm’s sustained competitive advantage, qualitative analysis considers four areas of its operations:

Answer 11

1. Corporate issues
2. Products and markets
3. Production and distribution
4. Competition

Question 12

When is using FCFE more appropriate? When is DDM more appropriate

Answer 12

FCFE= when valuing a firm that is likely to be taken over or have its management changed
DDM= when changes in corporate control are more difficult to effect because of size or legal restrictions on takeovers

Question 13

Advantages of FCFF

Answer 13

• includes after tax interest cost
• more appropriate to use when valuing firms with high leverage or that are in the process of changing leverage
• more appropriate when FCFE is negative

Question 14

Petroleum reserves are divided into three major classifications:

Answer 14

1. Proved (P90, 1P)- reasonable certainty of recovery
2. Probable (P50, 2P)- claim of a 50% recovery confidence interval
3. Possible (P10, 3P)- claim of a 10% recovery confidence interval

Question 15

Subcategories of P90/P1

Answer 15

1. Proved developed reserves (PDP)
2. Proved developed not producing reserves (PDNP) (risked of 25%)
3. Proved undeveloped reserves (PUD) (risked of 35%)

Question 16

Define BOE (barrel of oil equivalent)

Answer 16

• the amount of barrels (bbls) of oil used when measuring liquid reserves
• the amount of natural gas reserves at a conversion ratio of 6000 scf of natural gas per BOE. This second factor reflects the fact that 6000 scf of natural gas contains the same amount of heat as one barrel of oil (BTU equivalency)

Question 17

One scf of natural gas contains one ____, and one barrel of oil contains ____ ___ of heat

Answer 17

BTU
6000
BTU

Question 18

Economic value

Answer 18

market value of equity + book value of outstanding debt = cash and ST investments

Question 19

What is reserve life index (RLI)?

Answer 19

• the number of years its would take to deplete the company’s existing reserves at its current daily production rate
• calculated as BOE/(BOE/d x 365)

Question 20

What is the recycle ratio?

Answer 20

• measure of operational profitability and exploration efficiency
• relates the current gross profit per barrel of production to the cost of finding and developing an additional barrel of reserves
• calculated as filed netback per BOE/ F&D costs per BOE
• field netback per BOE= rev per BOE - direct operating costs per BOE - provincial royalties per BOE

Question 21

What is the #1 key cash flow multiple used for evaluating oil and gas companies?

Answer 21

Debt adjusted cash flow (DACF) = CFO + financing costs (after tax) + exploration costs (before tax) +/- changes in WC

Question 22

What are the 5 NI43-101 resource categories?

Answer 22

1. Inferred mineral resource
2. Indicated mineral resource
3. Measured mineral resource
4. Probable mineral resource
5. Proven mineral resource

Question 23

Describe head grade

Answer 23

• the average grade of the ore at the face of the mine

- has an inverse relationships with the cost to mine and gross margin

Question 24

Explain the metrics used in the analysis of mining companies

Answer 24

• primary equity valuation metric = market value per ounce of resource or reserve
• early stage companies = market price to net asset value per share
• currently producing companies = cash flow based metric (EV before int, taxes, dep, amort) and a present value type metric (market price to NAVPS)