Equity

Question 1

Strategic buyers for acquisitions prefer which value?

Answer 1

Investment value

Question 2

Which type of absolute valuation models are most important?

Answer 2

PV of common stock/ DCF

Question 3

Conglomerate Discount?

Answer 3

The difference between company value and SOTP value.
SOTP = sum of the parts
SOTP value is also known as breakup value or private market value.

Question 4

Paris trading strategy?

Answer 4

Buy one and sell one share in same industry.

Question 5

Sustainable growth rate assumes growth rate through which funds?

Answer 5

Internally generated funds and debt only.
It approx the average rate at which dividend can grow over a long horizon.

Question 6

Which free cash flow method is suitable when company has significant debt outstanding?

Answer 6

FCFF

Question 7

What is the impact of following on FCFF and FCFE
a) Dividend
b) Share repurchase
c) Share Issue
d) Change in leverage

Answer 7

a) b) and c) have no impact on both
d) has effect on FCFE but not FCFF

Question 8

Which model of dividend valuation is best suited for a company which has slow growth rate in earning and dividend and there Is need for reinvestment?

Answer 8

2 stage

Question 9

In practical life, which model is used to calculate dividend valuation?

Answer 9

Spreadsheet Modelling

Question 10

True or false-
Residual Income approach uses the book value of equity and requires that the clean surplus relation does not hold.

Answer 10

False, requires clean surplus relation hold
Clean surplus failure occurs when G/L are directly routed through BS and no effect on NI.

Question 11

Method of comparables is based on law of one price.

Answer 11

True

Question 12

while calculating trailing or leading P/E which EPS should be used?

Answer 12

Diluted

Question 13

Which multiple is used by investment community?

Answer 13

P/E

Question 14

Which multiple is used for
a) distressed/ startup/ mature or cyclical firms?
b) different capital structure

Answer 14

a) P/S
b) EV/EBITDA (it includes control premium)

Question 15

Which method is linked to value theory while computing P/CF?

Answer 15

FCFE.
Since EBITDA overestimates CF from OA when WC is growing.

Question 16

The least affected valuation method for international comparison is?

Answer 16

P/FCFE

Question 17

which method is best to calculate normalised earning?
a) Historical EPS
b) Average ROE

Answer 17

Average ROE, as historical EPS ignores size.

Question 18

Projected PE (regression analysis) is affected by?

Answer 18

Multi collinearity
Cross sectional (a regression in which the explained and explanatory variables are all based on the same point in time) regression have unknown predicted power outside the specific sample and time period.

Question 19

What is FED Model?

Answer 19

It assumes overall market to be overvalued of EY is less than 10 yr US Bond

Question 20

What are the assumptions of PEG ratio?

Answer 20

a) liner relationship between PE and growth.
b) does not factor in difference in risk
c) does not account for difference in duration of growth.

However, for PE in terms of DDM, in theory shows relation is non linear.

Question 21

What is Molodovsky Effect?

Answer 21

High PE on depressed EPS at bottom of cycle and low PE on unusually high EPS at top of the cycle.

Question 22

Which measures are used for managerial measurement of effectiveness and executive compensation and testing of impairment of Goodwill?

Answer 22

Residual income, EVA and MVA
In residual income, Interest expense reflect the true cost of debt.

Question 23

What is the difference between valuation as per dividend model and residual income model?

Answer 23

Answer is same, but terminal value as per DDM is more.

Question 24

What does high w (persistence factor) imply?

Answer 24

High w = strong market positon and low dividend payout implying late decline of RI.

Low w = extreme accounting rate of return implying quick decline of RI.

Question 25

Which private company valuation method is best suited for -
a) company with unstable growth
b) Distressed or initial phase

Answer 25

a) Income approach
b) Assets approach

Question 26

Which relative valuation method in private company valuation requires adjustment for control premium?

Answer 26

Guideline public company method

Question 27

What impact does company specific and industry specific factors have on private company valuation?

Answer 27

Company specific - can be positive or negative
Industry specific = usually negative

Question 28

What is the adjustment for manager compensation while computing normalized earning?
a) Strategic buyer
b Financial buyer

Answer 28

a) Will make adjustment for same
b) will not make adjustment

Question 29

There is more heterogenity in discount rate, risk and valuation method in private company or public company?

Answer 29

Private company

Question 30

True or false?
In general, the H-value approximation is more accurate the shorter the high-growth period, t, and/or the smaller the spread between the short-term and long-term growth rates, gS – gL .

Answer 30

True

Question 31

Income from restructuring charge reversals and other noncash gains should be adjusted how?

Answer 31

Subtracted from income

Question 32

Which CF are poor proxy for FCFE?

Answer 32

Net Income and EBITDA

Question 33

Which method of CF is generally used in international valuation, especially for companies in countries with high inflationary expectations when estimation of nominal growth rates and required returns is difficult.

Answer 33

Single stage FCFE

Question 34

True or false
Nonoperating assets constitute a portion of firm value and must be included when valuing a private firm

Answer 34

True