Equity

Question 1

Fair (Market) Value

Answer 1

Fair (Market) Value – price at which an asset/liability would change hands

Question 2

Investment Value

Answer 2

Investment Value – value to a specific buyer, taking account of potential synergies

Question 3

Sum-of-Parts Valuation

Answer 3

Sum-of-Parts Valuation – a valuation that sums the estimated values of each of a company’s business as if each business were an independent going concern

Question 4

GGM Equity Risk Premium Estimate =

Answer 4

GGM Equity Risk Premium Estimate = dividend yield on the index based on year-ahead aggregate forecasted dividends and aggregate market value + consensus long-term earnings growth rate – current long-term government bond yield

Question 5

(Macroeconomic Model; Ibbotson-Chen Model) Equity Risk Premium =

Answer 5

(Macroeconomic Model; Ibbotson-Chen Model) Equity Risk Premium = {[(1 + EINFL)(1 + EGREPS)(1 + EGPE) – 1.0] + EINC} – Expected Risk-Free Rate = {[(1 + Expected Inflation)(1 + Expected Growth Rate in Real EPS)(1 + Expected Growth Rate in P/E) – 1.0] + Expected Dividend Yield or Expected Income Portion} – Expected Risk-Free Rate

Question 6

CAPM (doesn’t ___, not best for ___)

Answer 6

CAPM (doesn’t capture company specific risk, not best for individual securities) ri = E(rf) + B(Equity risk premium)

Question 7

Fama French Model

Answer 7

Fama French Model: r_i= r_f+β_i^mkt RMRF+ β_i^Size SMB+β_i^value HML , where RMRF: RM – RF, SMB: small minus big [market cap], HML: high minus low [book to market]

Question 8

Pastor-Stambaugh Model (PSM)

Answer 8

Pastor-Stambaugh Model (PSM) – extension to FFM adds liquidity factor

Question 9

Unlevered/Relevered Beta

Answer 9

Unlevered/Relevered Beta: β_U=[1/(1+D/E)] β_E , β_E^’= [1+D^’/E’] β_U

Question 10

WACC

Answer 10

WACC = MVD/(MVD+MVCE)rd(1-T) + MVCE/(MVD+MVCE)r

Question 11

5 Forces

Answer 11

5 Forces: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, rivalry among existing competitors

Question 12

The Right Strategic Style for your Environment

Answer 12

The Right Strategic Style for your Environment - Adaptive: unpredictable industry, can’t change it; Shaping: unpredictable industry, can change it; Classical: predictable industry, can’t change it; Visionary: predictable industry, can change it

Question 13

Top-down approaches …

Answer 13

Top-down approaches begin at the level of the overall economy, bottom-up approaches begin at the level of the individual company, and hybrid approaches include elements of top-down and bottom-up approaches

Question 14

Return on Capital Employed (ROCE)

Answer 14

Return on Capital Employed (ROCE) is a pre-tax return measure that can be useful in the peer comparison of companies in countries with different tax structures

Question 15

A discounted dividend approach is most suitable for …

Answer 15

A discounted dividend approach is most suitable for dividend-paying stocks I which the company has a discernable dividend policy that has an understandable relationship to the company’s profitability

Question 16

Gordon Growth Model: Vo=

Answer 16

Gordon Growth Model: V_0=(D_0 (1+g))/(r-g) or V_0=D_1/(r-g) , where g = b*ROE, ROE = NI / SH/E

Question 17

Present Value of Growth Opportunities

Answer 17

Present Value of Growth Opportunities: V_0=E_1/r+PVGO , r from CAPM

Question 18

Leading P/E

Answer 18

Leading P/E: P_0/E_1 =(D_1⁄E_1 )/(r-g)=(1-b)/(r-g)

Question 19

Trailing P/E

Answer 19

Trailing P/E: P_0/E_0 =((D_0 (1+g))⁄E_0 )/(r-g)=((1-b)(1+g))/(r-g)
dividend payout ratio = 1 – b; D0 = (1-b)EPS

Question 20

Preferred Stock: Vo =

Answer 20

Preferred Stock: V_0=D/r

Question 21

Two-stage DDM: Vo =

Answer 21

Two-stage DDM: V_0=∑_(t=1)^n▒〖(D_0 〖(1+g_s)〗^t)/〖(1+r)〗^t +(D_0 (1+g_s )^n (1+g_L))/((1+r)^n (r-g_L))〗

Question 22

The H-model assumes that …

Answer 22

The H-model assumes that the dividend growth rate decline linearly from a high supernormal rate to the normal growth rate during Stage 1: V_0=(D_0 (1+g_L )+D_0 H(g_S-g_L))/(r-g_L ) , where H – half life in years of the high growth period

Question 23

Sustainable growth rate

Answer 23

Sustainable growth rate: g = b * ROE, b = retention ratio

Question 24

Compound Annual Growth Rate in Dividends

Answer 24

Compound Annual Growth Rate in Dividends: g= (〖EPS〗_tx/〖EPS〗_ty )^(1/(x-y))-1

Question 25

Free cash flow approach might be appropriate when …

Answer 25

Free cash flow approach might be appropriate when the investor takes a control perspective

Question 26

FCFF is preferred over FCFE when …

Answer 26

FCFF is preferred over FCFE when a company is leveraged and expecting a change in capital structure

Question 27

Firm Value (FCFF) =

Answer 27

Firm Value = 〖FCFF〗_1/(WACC-g) ; Equity = FV – Debt

Question 28

Equity Value (FCFE) =

Answer 28

Equity Value = 〖FCFE〗_1/(r-g)

Question 29

FCFF (NI) =

Answer 29

FCFF = NI + NCC + Int(1-T) – FCInv – WCInv = net income + net noncash charges (depreciation) + interest expense * (1 – Tax Rate) – Investment in fixed capital – investment in working capital

Question 30

FCFE (NI) =

Answer 30

FCFE = NI + NCC – FCInv – WCInv + Net Borrowing

Question 31

FCFE (FCFF) =

Answer 31

FCFE = FCFF – Int(1-T) + Net Borrowing

Question 32

FCFE (CFO) =

Answer 32

FCFE = CFO – FCInc + Net Borrowing

Question 33

FCFF (EBITDA) =

Answer 33

FCFF = EBITDA(1-T) + Dep.(T) – FCInv – WCInv

Question 34

FCFE (DR) =

Answer 34

FCFE = NI – (1-DR)(FCInv – Dep.) – (1-DR)(WCInv) , where DR – target debt ratio

Question 35

Single-Stage Model (FCFE): Vo =

Answer 35

Single-Stage Model: V_0=(〖FCFE〗_0 (1+g_real))/(r_real-g_real )

Question 36

Justified P/B

Answer 36

Justified P/B: P_0/B_0 =(ROE-g)/(r-g) ; g=b*ROE

Question 37

Justified P/S

Answer 37

Justified P/S: P_0/S_0 =(〖(E〗_0⁄(S_0)(1-b)(1+g)))/(r-g) ; E/S = profit margin, g = long-run earnings growth rate

Question 38

PEG is calculated as …

Answer 38

PEG is calculated as the ratio of the P/E to the consensus growth forecast

Question 39

Enterprise Value

Answer 39

Enterprise Value: EV = E + D – Cash & ST Investments; EV = EBITDA * EV/EBITDA multiple; EBITDA = net income + interest + tax + depreciation + amortization
Enterprise Value: EV = MV of Common Equity + MV of Debt + Non-Controlling Interest – Cash and Investments

Question 40

EBITDA overestimates …

Answer 40

EBITDA overestimates CFO if working capital is growing

Question 41

Residual Income

Answer 41

Residual Income: RI = Net Income – Equity * rE , where Equity * rE is the ‘equity charge’

Question 42

Economic Value Added

Answer 42

Economic Value Added  Economic Profit = NOPAT - $WACC

Question 43

Multistage Residual Income Model: Vo =

Answer 43

Multistage Residual Income Model: V_0= B_0+ ∑(t=1)^T▒〖(E_t-rB(t-1))/〖(1+r)〗^t +(P_T-B_T)/〖(1+r)〗^T 〗 , P-B = premium over book value

Question 44

Single-Stage Residual Income Model: Vo =

Answer 44

Single-Stage Residual Income Model: V_0=B_0+(ROE-r)/(r-g) B_0 where B0 – book value per common share, r – cost of equity, g – long-term dividend growth rate

Question 45

Intrinsic Value

Answer 45

Intrinsic Value – the value obtained if an option is exercised based on current conditions

Question 46

Excess Earnings Method

Answer 46

Excess Earnings Method (EEM): an income approach that estimates the value of all intangible assets of the business by capitalizing future earnings in excess of the estimated return requirements associated with working capital and fixed assets

Question 47

Discounts for lack of control

Answer 47

Discounts for lack of control, DLOC = 1 – [1 / (1 + Control Premium)]