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CFA Level II 2023 > Corporate Issuers > Flashcards

Corporate Issuers Flashcards

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CFA flashcards
1
Q

Common Top-Down Approaches to modeling revenue

A
  1. Growth relative to GDP Growth
  2. Market Growth & Market Share
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2
Q

Bottom-Up Approaches to Modeling Revenue

A
  1. Time Series
  2. Returns based measure
  3. Capacity Based Measure
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3
Q

Statutory Tax Rate

A

Corporate Tax Rate of the Country in which the company is domiciled

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4
Q

Effective Tax Rate

A

Reported income tax expense on the income statement divided by pre-tax income

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5
Q

Cash Tax Rate

A

Cash paid for taxes divided by pre-tax income

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6
Q

Illusion of Control Bias

A

Tendency to overestimate what can be controlled and ultimately taking fruitless actions in pursuit of control ie. building overly complex models or collecting more information than needed

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7
Q

Conservatism Bias

A

Prior views or forecasts are maintained despite new evidence or information to the contrary. Also called Anchoring Bias.

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8
Q

Representativeness Bias

A

Tendency to classify new information based on past experiences or known classifications

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9
Q

Confirmation Bias

A

Tendency to look for and notice what confirms prior beliefs and to ignore or discount what contradicts prior beliefs.

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10
Q

Porter’s Five Forces

A
  1. Threat of Substitute Products
  2. Intense Rivalry Among Competetive Participants
  3. Bargaining Power of Suppliers
  4. Bargaining Power of Customers
  5. Threat of New Entrants
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11
Q

Liquidating Dividend

A
  1. When a company is going out of business and net assets are distributed to shareholders
  2. Sells a portion of its business for cash and proceeds are distributed
  3. Pays a dividend that exceeds its accumulated retained earnings (impairs stated capital)
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12
Q

Flotation Costs

A

Costs incurred in the selling of shares ie. underwriter’s fees, legal costs, registration expenses

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13
Q

Dividend Policy Does Not Matter

A

Assumes Perfect capital markets, with no taxes are expenses. There is no distintion between share repurchases and dividends paid out

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14
Q

Dividend Policy Matters: The Bird in the Hand Argument

A

The argument that investors prefer a dollar of dividends over a dollar of potential cap gains because they view reinvested earnings as more risky. “A bird in the Hand is worth more than two in a bush.”

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15
Q

Dividend Policy Matters: The Tax Argument

A

If capital gains are taxed less than dividends, investors should prefer capital gains

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16
Q

6 Factors that affect Company Dividend Policy

A
  1. Investment Opportunities
  2. The Expected Volatility of Earnings
  3. Financial Flexibility
  4. Tax Considerations
  5. Flotation Costs
  6. Contractual and Legal Restrictions
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17
Q

Double Taxation System

A

Pretax earnings are taxed at a corporate level and then taxed again at the sharesholder level

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18
Q

Dividend Imputation Tax System

A

Corporate Profits distributed as dividends are taxed just once at the shareholder’s tax rate

“Franking Credit” is a tax credit to offset corporate taxes to shareholders

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19
Q

Split-Rate Tax System

A

Earnings ditributed as dividends are taxed at a lower corporate tax rate, and then taxed at the individual investor’s income tax rate

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20
Q

Stable Dividend Policy

A

Regular Divedends paid do not reflect short term volatility in earnings

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21
Q

Constant Dividend Payout Ratio

A

Paying out a constant percentage of net income in dividends

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22
Q

4 Share Repurchase Methods

A
  1. Buy in the Open amrket
  2. Buy a fixed number of shares at a fixed price “fixed price tender offer”
  3. Dutch Auction
  4. Repurchase by Direct Negotiation
23
Q

Dutch Auction

A

Tender offer to existing shareholders where the company stipulates a range of prices; uncovers the minimum price at which the company can buy back the desired shares

24
Q

Dividend Coverage Ratio

A

Net Income / Dividends

25
Q

Dispersed Ownership

A

Existance of many shareholders, none which have the ability to indivisually exercise control

26
Q

Concentrated Ownership

A

Individual a group with enough shares to exercise control over the Company

27
Q

Principal-Agent Problem

A

Dispersed ownership and Dispersed voting power; Strong manager, weak shareholders

28
Q

Principal-Principal Problem

A

Concentrated ownership & Concentrated voting power; strong shareholders and weak managers.

29
Q

Insider

A

When managers and Board of Directors are also shareholders

30
Q

Independent Board Directors

A

Board Directors with no material relationship with company in the form of employment, renumeration or ownership

31
Q

Shareholder Activism

A

Strategies used by shareholders to attempt to compel a company to act a certain way

32
Q

Stranded Assets

A

Assets that are obsolete or economically unviable, often owing to regulatory changes or government policy

33
Q

Weighted Average Cost of Capital (WACC)

A
34
Q

Cost of Debt

A
35
Q

Cost of Equity

A
36
Q

Cumulative Preferred Stock

A

Requires that a company pay in full any issed diveneds before paying other common shareholder dividends.

37
Q

Finance (or capital) Lease

A

An example of an amortized loan, where the lesee owns or has the right to own the equipment at the end of the lease.

Capitalized on the financial statement

38
Q

The two methods of estimating ERP

A
  1. Historical Approach (ex post)
  2. Forward Looking Approach (ex ante)
39
Q

ERP Formula Using Gordon Growth Model

A
40
Q

Grinold-Kroner Model to estimate ERP

A
41
Q

Required Rate of Return Formula using DDM

A
42
Q

Bond Yield Plus Risk Premium Approach to Estimating Required Rate of Return on Equity

A
43
Q

Fama-French Model

A
44
Q

Five Factor Fama-French Model

A
45
Q

Required Return on Equity for Private Companies often Includes:

A
  1. Size Premium (SP)
  2. Industry Risk Premium (IP)
  3. Specific Company Risk Premium (SCRP)
46
Q

Expanded CAPM Model

A

Private Company

47
Q

Build-Up Approach

A

Private Company

48
Q

Country Spread Model

A

Emerging Market Company

49
Q

Country Risk Premium Estimation

Aswath Damodaran (2021)

A
50
Q

Global CAPM (GCAPM)

A

Single global index is the only factor

51
Q

International CAPM (ICAPM)

A
52
Q

Types of Corporate Restructurings

A
53
Q

Conglomerate Discount

A

Entity is trading below the Fair Value of the Sum of its parts

54
Q

Takeover Premium

A

CFA Level II 2023 (5 decks)

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