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CFA - Equity > Equity > Flashcards

Equity Flashcards

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CFA flashcards
1
Q

Gordan growth model equity risk premium

A

1 yr forecasted div yield on market index + consensus long term earnings growth rate - long term government bond yield

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2
Q

Paster-Stambaugh model

A

adds liquidy factor to the fama-french model

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3
Q

Blume Adjustments

A

adjusted beta = (2/3 x raw beta) + (1/3 x 1)

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4
Q

Use DCF modles when

A
  1. Firm has dividend history
  2. Dividend policy is related to earnings
  3. Minority shareholder perspective
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5
Q

Use FCF models when

A
  1. Firm lacks table dividend policy
  2. Dividend policy not related to earnings
  3. FCF is related to profitability
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6
Q

Use RI model when

A
  1. Firm lacks dividend history
  2. Expected FCF is negative
  3. Firm has transparent financial reporting and high quality earnings
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7
Q

GGM

A

Assumes perpetutal D growth rate

Vo= D1/(r-g)

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8
Q

Limitations to GGM

A

Very sensitive to estimates of r and g
difficult with non dividend stocks
difficult with unpredictable growth patterns (use multi-stage)

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9
Q

Present Value of Growth Opportunities

A

Vo= E1/r + PVGO

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10
Q

H - Model

A

Vo= [Do *( 1+gl)]/(r-gl) + [Do * H *(gs-gl)]/( r-gl)

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11
Q

SGR

A

SGR= earnings retention rate x ROE

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12
Q

Solving for required return

A

r = D1/Po + g

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13
Q

FCFF -NI - Assuming depreciation is the only NCC

A

FCFF= NI + Dep + Int *(1-tax) - FCinv - WCinv

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14
Q

FCFF -EBIT - Assuming depreciation is the only NCC

A

FCFF= EBIT *(1-tax rate) + Dep - FCinv - WCinv

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15
Q

FCFF -EBITDA - Assuming depreciation is the only NCC

A

FCFF= EBITDA (1-tax rate) + Deptax rate - FCinv - WCinv

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16
Q

FCFF -CFO - Assuming depreciation is the only NCC

A

FCFF = CFO + [int * (1-tax)] - FCInv

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17
Q

FCFE - from FCFF

A

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

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18
Q

FCFE - from NI

A

FCFE = NI + Dep - FCInv - WCInv + Net borrwing

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19
Q

Single State FCFF

A

Vo= FCFF1/ (wacc - g)

20
Q

Single stage FCFE

A

Vo = FCFE1/ (r-g)

21
Q

Problems with P/E

A
  • if earnings are less than 0 PE is meaningless
  • volatile, transitory portion of earnings makes interpretation difficult
  • Management discretion over accounting choices
22
Q

Justified leading P/E

A

= payout ratio/(r-g)
= (D1/E1) / (r- g)
= P0/E1

23
Q

Justified trailing P/E

A

=payout ratio * (1+g)/ (r-g)
= (D1/E0) / (r- g)
= P0/E0

24
Q

Price to Book - advantages

A
  • BV almost always greater than 0
  • BV more stable than EPS
  • Measures NAV for FIs
25
Q

Price to Book - disadvantages

A
  • Size differences cause misleading comparisons
  • Influences by accounting choices
  • BV cannot equal market value due to inflation/tech
26
Q

justified PB

A

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

27
Q

DuPont

A

ROE = NI/S * Sales/TA * TA/E

28
Q

Price to cash flows - Advantages

A
  • cash flow harder to manipulate than EPS
  • More stable than PE
  • Mitigates earnings quality concerns
29
Q

Price to cash flows - disadvantages

A
  • difficult to estimate true CFO

FCFE better but more volatile

30
Q

RI Models

A 
RI = Et - (r x Bt-1) = (ROE - r) * Bt-1  t-1 
Et = expected EPS for year t
Bt-1 = book value per share in the year t-1
31
Q

Single Stage RI

A

Vo = Bo +[(ROE - r) * Bo/ (r-g)]

32
Q

Economic Value added

A 
EVA = NOPAT - $WACC
NOPAT = EBIT(1-t)
33
Q

Private Equity valuation - DLOC

A

DLOC = 1 - [1/(1 + control)]

34
Q

Residual Income

A

NI - stock holders opportunity cost.

Required return * total equity

35
Q

MVA market value added

A

MVA= market value - total capital

36
Q

How to calculate value of equity using ccm capitalized cash flow method

A

Value of equity = FCFE1/(r-g)

37
Q

Calculate Justified price to BV

A

(Roe - g)/ (r - g)

38
Q

Clean surplus

A

ending book value = beginning book value + net income - dividends
may not hold when items bypass the income statement and affect equity directly. Foreign currency gains and losses under the current rate method bypass income statement and are reported under shareholders equity as CTA

39
Q

Relative-strength indicators

A

The belief that there are patterns of persistence or reversals in returns provides the rationale for valuation using relative strength indicators. There has been a considerable amount of empirical research in this area. Research suggests that the investment horizon is also an important determining factor in the appearance of these patterns.

40
Q

how to unlever and lever a beta

A

= beta x 1/ (1 + debt/equity)

to lever = unlevered beta x (1 + debt/equity)

41
Q

PRAT

A

Profit margin
Retention ratio
Asset Turnover
T - leverage

42
Q

The guideline transactions method
he guideline public company method
The prior transaction method

A

The guideline transactions method (GTM) generates a value estimate based on pricing multiples associated with the acquisition of control of entire companies. The guideline public company method (GPCM) generates an estimate of value based on the multiples from trading activity in the shares of public companies that are similar to the private company in question. The prior transaction method (PTM) uses actual transactions in the stock of the subject private company.

43
Q

an example of a transaction-related valuation for a private company

A

Venture capital financing, initial public offering (IPO), bankruptcy proceeding, performance-based managerial compensation, and sale in an acquisition are all examples of transaction-related valuations for a private company.

44
Q

Tax burden ratio

A

Tax burden = NI/EBT or 1 - the effective tax rate.

45
Q

Equity risk premium formula

A

Equity risk premium = forecasted dividend yield + consensus long term earnings growth rate - long-term government bond yield.

46
Q

Excess Earnings

A

The excess earnings method values tangible and intangible assets separately; this method is useful for small firms and when there are intangible assets to value. In the free cash flow method, a firm is valued by discounting a series of discrete cash flows plus a terminal value. In the capitalized cash flow method, a firm is valued by discounting a single cash flow by the capitalization rate.

47
Q

Asset-based approach

A

The asset-based approach is usually not used for most going concerns, but is appropriate for troubled firms, finance firms, investment companies, firms with few intangible assets, and natural resource firms. It values equity as the asset value of a firm minus the debt value of the firm.

CFA - Equity (9 decks)

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