Equity Valuation Flashcards
FCFF from EBITDA
EBITDA x (1-T) + Dep x (T) - WCInv - FCInv
FCFF from EBIT
EBIT x (1-T) + Dep - WCInv - FCInv
FCFF from NI
NI + NCC + Int x (1-T) - WCInv - FCInv
FCFF from CFO
CFO + Int x (1-T) - FCInv
FCFF to FCFE
FCFF - Int x (1-T) + Net Borrowing
Constant growth residual income
BV0 +[(ROE-r)/(r-g)] x BV0
Clean surplus
Ending book value of equity equals the beginning book value plus earnings minus dividends, apart from ownership transactions.
Discounts on private investments
Total Discount = 1 − [(1 − DLOC)(1 − DLOM)]
PRAT model
G = P x R x A x T
Total Discount Private Companies
Total Discount = [1 – (1 – DLOC)×(1 – DLOM)]
Private company discount steps
First move from controlling to non-controlling basis
Second move from marketable to non-marketable basis
Define Intrinsic Value and sources of mispricing.
Intrinsic value (V) is the true, underlying value based on fundamentals. Perceived mispricing arises from the difference between Market Price (P) and Estimated Value (VE). Actual Mispricing = V - P. Valuation Error = VE - V.
Contrast Going Concern Value and Liquidation Value.
Going Concern: Assumes the company continues operating indefinitely; value based on future cash flows. Liquidation Value: Assumes assets sold off; value is net proceeds after paying liabilities. Most relevant for public companies is typically Going Concern or Intrinsic Value.
Contrast Absolute and Relative Valuation models.
Absolute: Value derived from fundamentals/cash flows, independent of market prices (e.g., DDM, DCF (FCFF/FCFE), Residual Income). Relative: Value estimated by comparing price multiples or ratios to comparable companies or benchmarks (e.g., P/E, P/B, P/S, EV/EBITDA).
What is Sum-of-the-Parts valuation?
Valuing different divisions/segments of a company separately (using appropriate methods for each) and summing them up. Often used for conglomerates, which may trade at a discount to this value.
When are Dividends, FCFE, and Residual Income most suitable for DCF valuation?
Dividends: Mature companies with stable dividend history, minority shareholders perspective. FCFE: Companies that pay dividends differing significantly from FCFE capacity, controlling shareholder perspective. Residual Income: Companies not paying dividends, negative FCFE, transparent accounting.
What is the Gordon Growth Model (GGM) formula and its assumptions?
V0=D1/(r−g). Assumes: constant perpetual dividend growth (g), g < r, stable business risk influencing r.
What is the Present Value of Growth Opportunities (PVGO)?
PVGO=V0−(E1/r). Represents the portion of the stock’s value attributable to expected future growth beyond the no-growth earnings level. Leading P/E = (1/r) + (PVGO / E1).
Define Justified P/E ratios (Leading and Trailing) based on GGM.
Justified Leading P/E: P0/E1=(D1/E1)/(r−g)=(1−b)/(r−g). Justified Trailing P/E: P0/E0=[(1−b)(1+g)]/(r−g). Where ‘b’ is the retention ratio.
Contrast the stages in multi-stage DDM/FCF models (Growth, Transition, Maturity).
Growth: Rapidly expanding markets, high profit margins, high growth rate > r. Transition: Growth slowing due to competition, margins declining, growth rate approaches r. Maturity: Growth stabilizes at a sustainable long-term rate (often <= economy growth rate), g < r.
What is the H-Model formula and its assumption?
V0=[D0(1+gL)+D0H(gS−gL)]/(r−gL). Assumes linear decline in growth rate from short-term (gS) to long-term (gL) over 2H periods. H = half-life of high growth period.
How is Sustainable Growth Rate (SGR) calculated and linked to DuPont?
SGR=b×ROE, where b = retention ratio = (1 - Dividend Payout Ratio). DuPont decomposes ROE: ROE=(NI/Sales)×(Sales/Assets)×(Assets/Equity) (Net Profit Margin x Asset Turnover x Financial Leverage).
Define FCFF and FCFE.
FCFF (Free Cash Flow to Firm): Cash flow available to all capital providers (debt & equity) before financing payments. FCFE (Free Cash Flow to Equity): Cash flow available to common shareholders after debt payments (interest & principal).
How are FCFF and FCFE calculated starting from Net Income?
FCFF: NI+NCC+Int(1−T)−FCInv−WCInv. FCFE: NI+NCC−FCInv+NetBorrowing−WCInv. (NCC=Non-cash charges, FCInv=Fixed Capital Inv, WCInv=Working Capital Inv).
