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CFA > Equity > Flashcards

Equity Flashcards

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CFA flashcards
1
Q

What is the formula for equity risk premium according to the Gordon Growth Model?

A 
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
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2
Q

What is the formula for equity risk premium according to the macroeconomic model?

A

Equity risk premium =
{ [(1+EINFL)(1+EGREPS)(1+EGPE)−1.0]+EINC}−
Expected risk-free return

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3
Q

What is the Fama-French formula for equity risk premium?

A

ri = RF+ βmktiRMRF + βsizeiSMB + βvalueiHML

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4
Q

What is the Pastor-Stambaugh formula for equity risk premium?

A

ri = RF+ βmktiRMRF + βsizeiSMB + βvalueiHML+ βliqiLIQ

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5
Q

What is the formula for adjusted beta?

A

Adjusted beta = (2/3)(Unadjusted beta) + (1/3)(1.0)  

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6
Q

What is the formula for unleveraged beta (Bu)?

A

βU ≈ βE / (1 + (D/E))

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7
Q

What is the formula for leveraged beta (Be)?

A

βE ≈ βU (1 + (D/E))

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8
Q

What is the formula for return on invested capital (ROIC)?

A

ROIC = NOPLAT / (Operating assets - Operating liabilities)

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9
Q

What is the formula for return on capital employed (ROCE)?

A

ROCE = ROIC before tax

Best to analyze companies in different countries

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10
Q

What is the H-Model formula?

A

V0 = (D0(1+gL)+D0H(gS−gL)) / (r−gL)

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11
Q

What is the sustainable growth rate formula (g)?

A

g = b * ROE

b: Retention ratio

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12
Q

What is the formula for Free Cash Flow to the Firm (FCFF)?

A

FCFF = NI + Dep + Int(1-T) - FCInv - WCInv

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13
Q

What is the formula for Free Cash Flow to Equity (FCFE)?

A

FCFE = NI + Dep - FCInv - WCInv + NB

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14
Q

What is the formula for Forward P/E?

A

P0/E1 = (D1/E1)/(r-g) = (1-b)/(r-g)

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15
Q

What is the formula for Trailing P/E?

A

P0/E0 = (D0(1+g)/E0)/(r-g) = ((1-b)(1+g))/(r-g)

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16
Q

What is the formula for Justified P/B?

A

P0/B0 = (ROE - g)/(r-g)

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17
Q

What is the formula for Justified P/S?

A

P0/S0 = (PM(1+b)(1+g))/(r-g)

18
Q

What is the formula for Justified P/CF?

A

P0/CF0 = (1+g)/(r-g)

19
Q

What is the formula for Market Value Added (MVA)?

A

MVA = Market Value of Company - Accounting Book Value

20
Q

What is the formula for NOPAT?

A

NOPAT = EBIT(1-T)

21
Q

What is the formula to calculate the discount for lack of control (DLOC)?

A

DLOC = 1 - (1/(1+Control premium))

22
Q

What is the formula to calculate the total discount for DLOC & DLOM?

A

Total discount = (1-(1-DLOC)(1-DLOM))

23
Q

How can we know if a company is a mature phase?

A

Compare company’s EPS growth with economy’s rate of growth

24
Q

In which situations FCFF is preferable than FCFE?

A

1) FCFE is negative

2) Leveraged company with a changing capital structure

25
Q

What is the Molodovsky Effect?

A

The observation that P/Es tend to be high on depressed EPS at the bottom of a business cycle, and tend to be low on unusually high EPS at the top of a business cycle.

26
Q

What are the two methods to normalize EPS for cyclicality?

A

1) Method of historical average EPS (over the most recent full cycle) ; does NOT account for change in business size
2) Method of average return on equity (EPS = average ROE * current book value per share) ; sometimes preferred

27
Q

Why is the earnings yield (E/P) meaningful?

A

Reciprocal of P/E. When stocks have zero or negative EPS, a ranking by earnings yield is meaningful.

28
Q

What is PEG?

A

P/E to growth: (P/E)/g

Stocks with low PEG are more attractive

29
Q

What are some of the adjustments an analyst must make to book value?

A

1) Consider tangible book value per share (exclude goodwill)
2) LIFO vs FIFO
3) Off-balance sheet assets/liabilities

30
Q

What is the formula for Enterprise Value (EV)?

A

EV = Market value of equity + Market value of debt + Market value of preferred stock - Value of cash and investments

31
Q

What are some of the momentum valuation indicators?

A

1) Earnings surprise
2) Standardized Unexpected Earning (SUE)
3) Relative strength

32
Q

What is the Yardeni Model formula?

A

Current earnings yield = Current Moody’s Corporate Bond Yield - b * LT earnings growth + Residual

33
Q

What is the FED model?

A

Compares E/P on SP500 with yield-to-maturity on 10-Y US Treasury bonds
If E/P < Treasury bond yield: Overvalued
IF E/P > Treasury bond yield: Undervalued

34
Q

What are some adjustments needed to calculate the Economic Value Added (EVA)?

A

1) R&D capitalized and amortized rather than expensed
2) Deferred taxes eliminated
3) Inventory LIFO reserve added back to capital
4) Operating leases treated as capital leases
5) Nonrecurring items adjusted

35
Q

What is Tobin’s q formula?

A

Market value of debt and equity / Replacement cost of total assets

36
Q

What is the single-stage residual income model formula?

A

V0 = B0 + ( (ROE-r) / (r-g) ) B0

37
Q

What are the different approaches used to evaluate private companies?

A

1) Income approach
- Free cash flow (larger, mature private companies)
- Capitalized cash flow method (single-stage; smaller companies)
- Residual income (smaller companies)
2) Market approach
- Guideline public company method (Minority stake ; DLOC not expected)
- Guideline transactions method (Control ; DLOC expected)
- Prior transactions method
3) Asset-based approach
Companies worth more in liquidation than going concern ; very small companies ; recently formed and limited operating history ; asset holding companies

38
Q

What is the implied long term growth formula using the Gordon Growth Model?

A

r = (r-d) / (1+d)

39
Q

How do we calculate PVGO?

A

V0 = (E1/r) + PVGO

40
Q

What are the strengths of the residual income model?

A

Terminal values do not make up a large portion of the value relative to other models.

The models use readily available accounting data.

The models can be used in the absence of dividends and near-term positive free cash flows.

The models can be used when cash flows are unpredictable.

41
Q

What are the weaknesses of the residual income model?

A

The models are based on accounting data that can be subject to manipulation by management.

Accounting data used as inputs may require significant adjustments.

The models require that the clean surplus relation holds, or that the analyst makes appropriate adjustments when the clean surplus relation does not hold.

42
Q

When comparing the required rates of return for stocks in two countries, which adjustments are needed?

A

1) Country’s premium risk (model issues in emerging markets)
2) Exchange rate

GDP growth rate is not an important consideration

CFA (10 decks)

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