Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

My 2022 CFA LEVEL II > Equity > Flashcards

Equity Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

What is the intrinsic value of an asset?

A

Value of the asset given a complete understanding of the assets’ investment characteristics.

Estimated value = (Intrinsic value - Market price) + (Estimated value - intrinsic value)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is the meaning of these valuation?

Going-concern value
Liquidation value
Fair market value
Investment value

A

Going-concern value - assumes comapany will continue its business activities.

Liquidation value - assumes comapany was dissolved.

Fair market value - Price at which an asset can be sold at the market.

Investment value - Value to a specific buyer taking into account potential synergies based on the investor.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the purpose of equity valuation?

A

Stock selection
Inferring market expectations
Corporate event analysis such as mergers
Fairness opinions
Business stratgey analysis
Shareholder communication
Private equity valuation
Share based payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the valuation process?

A

1) Understand the business: Industry analysis
2) Forecast performance: Economic and company forecasts
3) Select valuation model
4) Estimate intrinsic value
5) Make investment recommediation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are Porter’s Five Forces?

A

It is a technique used during industry analysis.

Five competiton intensity in an industry

1) Threat of entry: New competitors
2) Bargaining power of suppliers
3) Bargining power of buyers
4) Threat of substitutes
5) Rivalry among existing competitors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is casflow from operation (CFO) and casflow from financing.

A

Cashflow from operations (CFO) show how much company is generating from its business.

Cashflow from financing (CFF) includes cashflows from finance leases.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is the other considation on equity equity valuation?

Control premiums
Marketability discounts
Liquidity discounts

A

Control premiums - ability to influence management and operations.
Marketability discounts - non-publicly traded companies are more difficult to sell.
Liquidity discounts - Less liquidity assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Calculate holding period return

A

r = D(h) / P0 + (P(h) - P0)/P0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Use the gorden growth model to calculate the return of a company.

A

r = (D1 / P0) + growth rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the formula for CAPM?

A

Expected return = Risk free return + Beta (Market return - Risk free return)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How to calculate adjusted beta?

A

Adjusted beta = 1 / 3 + 2 / 3 * Unadjusted raw beta

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How to calculate beta for a non-public company?

A

Beta leveraged = Beta unleveraged * (1 + Debt / Equity)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Calculate the required return using fama french model, carhart model, and pastor stambaugh model.

A

Fama french model:

E(R) = risk free return + Beta * (market return - risk free return) + Beta * (small - big) + Beta * (high minus low valuation)

Pastor stambaugh model:

E(R) = Fama french model + liquidity premium

where
liquidity premium = Beta * (low liquidity - high liquidity)

Carhart model:

Fama french model + price momentum

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How to calculate weighted average cost of capital (WACC)?

A

WACC =
Weight of debt * cost of debt * (1 - tax)
+ weight of equity * cost of equity
+ weight of preferred stock * cost of preferred stock.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Calculate the Equity price using Gorden growth model.

A

P =
D (1 + g) / (required return - g)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

When it is appropriate to use FCFE over DCF?
When it is appropriate to use FCF?

A

Most appropriate when
company not paying dividend or not stable.

FCFE more appropriate when considering a control stake, take over
When the investor have controlling interests

FCFF more appropriate if company has a high and unstable leverage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Calculate FCFF from net income?

A

FCFF = Net income + Non-cash charges
+ interest expense * (1 - tax rate)
- investment in fixed capital
- investment in working capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Calculate FCFF from CFO?
What is the difference between US GAAP and IFRS?

A

FCFF = CFO + interest * (1 - tax) - FC Inv

CFO = NI + NCC - WC Inv

under IFRS, Interst paid can be in CFO or CFF. If CFF, do not add back interest paid.

Under US GAPP, need to add back interest.

19
Q

Calculate FCFF using EBITDA.

Calculate FCFE using EBITDA.

A

FCFF = EBITDA (1 - tax) + Dep’n * (tax) - FC inv - WC inv

FCFE = EBITDA (1 - tax) - Interest * (1 - tax) + Dep’n * tax - FC inv - WC inv + Net borrowing

20
Q

Calculate firm value using FCFF.
Calculate equity value using FCFE.

A

Firm value = FCFF / WACC
Equity value = FCFE / Cost of equity

21
Q

Calculate FCFE (Free cashflow to equity)?

Calculate FCFE using CFO?

What is the different between US GAAP and IFRS?

A

FCFE = FCFF
- Interest * (1 - tax)
+ Net borrowing

FCFE = Net Income
+ Noncash charges
+ Dep’n
- Investment in fixed capital
- Investment in working capital
+ Net borrowing

  • Do not add back interest * ( 1- tax)

FCFE = CFO
- Investment in fixed capital
+ Net borrowing
- Repayment debt
+ Issue new debt
- Perference dividend
- Repayment perference

FCFF = CFO
+ Interest * (1 - tax)
- Investment in fixed capital

CFO = Net income
+ Dep’n
- Investment in working capital

22
Q

Calculate EBIT using income statement items?

A

EBIT = Sales - Cost of good sold - Operating expense - Dep’n

23
Q

Calculate FCFE using EBIT and EBITDA?

A

FCFE = EBIT (1 - tax) + NCC - FC inv - WC inv
FCFE = EBITDA(1 - tax) + Dep (t) + NCC - FC inv - WC inv

24
Q

Forecasting free cash flow FCFE using target debt / capital ratio?

A

FCFE = Net Income - (1 - Debt / Assets) * (Capex - Dep’n + Increase in working capital)

25
Q

Which of the following non-cash items should be added back to net income for FCFF calculation?

Depreciation
Amortization
Restructuring charges (expense)
Reversal of restructuring reserves (income)
Losses
Gains
Amortisation of bond discount
Amortisation of bond premium
Deferred taxes

A

+Depreciation
+Amortization
+Restructuring charges (expense)
-Reversal of restructuring reserves (income)
+Losses
-Gains
+Amortisation of bond discount
-Amortisation of bond premium
+Deferred taxes

26
Q

Use the Fed model to determine the Market justified P/E.

What is the problem using this model?

A

Justified P/E = 1 / Bond yield

It ignore risk premium and long term growth.
Assume linear relationship.

27
Q

Use the Yardeni model to determine the Market justified P/E.

A

Earnings yield = Yield on A corp bond - retention ratio * consensus 5 year growth forecast of the market.

28
Q

Calculate the two stages growth H model.

A

Company value = [D0(1+Gl) + D0H*(Gs-Gl)] / (r - Gl)

where H = 0.5 * N
Gl = long term growth
Gs = short term growth
N is the legth of the high growth

29
Q

Caculate equity risk premium using Ibbotson and Chen model

A

Risk premium = ( 1 + inflation) * ( 1 + Real EPS Growth * (1+ P/E Growth) + Income Yield - risk free rate

30
Q

Calculate the trailing P/B

A

P / B = (ROE - g) / (r - g)aj

31
Q

Calculate FCFE using Debt/ Total assets target

A

FCFE = Net income - (1 - Debt / Total assets) * (Capex - Dep’n + Invest in WC)

32
Q

Calculate the leading and tailing P/E

A

Leading P/E = payout ratio / r - g

Trailing P/E = [payout ratio * (1 + g)]/ (r - g)

33
Q

Calculate company value using single stage residual income valuation.

A

Intrinsic value

V0 = B0 + (ROE - required return) / (Cost of equity- growth) * B0

34
Q

What is residual income?

Calculate residual income.

A

It is the net income of the firm less a charge of shareholder opportunity cost.

Residual income = Net income - (Book value of equity * cost of equity)

35
Q

Calculate residual income using WACC.

A

NOPAT (Net operating income after tax)

Residual income = EBIT * (1-tax) - WACC * (equity + debt)

This requires:
Cost of debt in income statement equal cost of debt in the market.
Leverage on book value equal leverage on market value
otherwise the residual income using WACC will be different.

36
Q

Calculate NOPAT (Net operating profit after tax).

A

NOPAT = EBIT (1 - t)
= (S - COGS - SG&A - D) * (1 - t)

COGS - Cost of Goods sold
SG&A - Sell, General and Administrative
D - Dep’n

37
Q

What are the common adjustments for Economic vaue added (EVA)?

A

Common adjustments:

R&D expenses should be capitalized and amortized.
Goodwill should be capitalized and not amortized.
Remove deferred taxes
Convert LIFO to FIFO
Treat operating lease as capital lease
Adjust for non-recurring items

38
Q

Calculate the value of intangible assets using excess earnings method.

A

Value of intangible assets = [Normalised income + (Working capital * required return on WC) + (Fixed Assets * required return on FA) ] / (Required return on intangibles assets - growth rate)

39
Q

Calculate PE using payout

A

PE = payout /(required return - growth)

where growth = profit margin * asset turnover * asset to equity leverage * ( 1 - payout ratio)

40
Q

Calculate residual income

A
41
Q

Calculate PE using Return on equity (RoE).

A

P/B = (ROE - growth) / (required return -growth)

42
Q

Calculate PE using inflation flow through rate.

A

P/E = 1 / (required rate of return + (1 - inflation flow through rate) * inflation)

43
Q

Calculate Present Value of Growth Opportunities (PVGO).

A

Company value = (Earnings at t=1 / required return) + PVGO

My 2022 CFA LEVEL II (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions