DCF

Question 1

How does NOLs affect enterprise value

Answer 1

Subtract it because it’s a non core business asset

Question 2

Explain NOLs

Answer 2

Key point: NOL is linked to DTA

NOLs occur when a business is making losses. A company does not receive tax benefits of course from losses, In reality it pays NOTHING in cash taxes!

This increases a company’s DTA to show that no tax benefit was actually received and NOL increases.

When company earns positive net income, it can use NOLs to reduce taxable income. This is only reflected on CFS to reflect lower CASH TAXES

DTA changes by (NOL creates - Used) * tax rate on BS and ofc the NOL on BS declines as more is used

Question 3

Why do we add the risk-free rate in CAPM?

Answer 3

Risk free rate provides a baseline RoR for investors

Question 4

What is CAPM model?

Answer 4

CAPM measures expected return on investment given systematic risk

Question 5

What’s beta?

Answer 5

Measurement of volatility of security compared to broader market. Beta shows how consistent returns are with the market - if beta is 1 - if market goes up by 10%, returns go up by 10%
Low beta = stable mature industries, healthcare, utilities

Question 6

What is Fair Market Value

Answer 6

Price seller’s willing to accept