Glossary 2

Question 1

Capital structure

Answer 1

The composition of the invested capital of the business enterprise

Question 2

DCF

Answer 2

Discounted cash flow

Question 3

Debt-Free Cash Flow (DFCF)

Answer 3

DFNI plus depreciation and amortization, less capital expenditures, less incremental debt-free working capital

Question 4

Debt-Free Net Income (DFNI)

Answer 4

Net income (after tax) plus interest expense (net of related tax deduction) related to invest capital holders.

Question 5

Debt-Free working capital

Answer 5

current assets, less current liabilities, excluding short-term interest-bearing debt

Question 6

Earning Cap Rate

Answer 6

The cap rate attributable directly to equity

Question 7

ESOP

Answer 7

Employee stock ownership plan

Question 8

Net Assets

Answer 8

Total assets less total liabilities

Question 9

Terminal Value

Answer 9

Sometimes also called residual value or future value, it is the prospective value as of the end of the discrete forecast period.

Question 10

After-Tax Interest on Debt

Answer 10

kd = Marginal Borrowing Rate (1 - Marginal tax rate)

Question 11

Beta

Answer 11

Bu = B1 / {(1+[(1-t)(D/E)]}
Br = Bu{1+[(1-t)(D/E)]}

Question 12

Build up Method

Answer 12

Ke = Rf + (RPm) +RPs +RPu

Question 13

Capitalization Rate

Answer 13

Cap Rate = Discount rate - Long-Term Growth Rate

Question 14

CAPM Capital Asset Pricing Model

Answer 14

ke = Rf + (RPm)B

Question 15

Modified CPAM Capital Asset Pricing Model

Answer 15

ke = Rf + (RPm)B +RPs + RPu

Question 16

Weighted Average Cost of Capital (WACC)

Answer 16

WACC = We(ke) + Wd(kd)

Question 17

Bl

Answer 17

Levered Beta

Question 18

Br

Answer 18

Re-levered beta

Question 19

Bu

Answer 19

unlevered beta

Question 20

E(Ri)

Answer 20

Expected rate of return on security i

Question 21

EBITDA

Answer 21

Earnings before deprecation, interest and taxes

Question 22

g

Answer 22

long term rate of growth

Question 23

kd

Answer 23

after tax discount or interest rate for debt

Question 24

ke

Answer 24

Discount rate for common equity capital (cost of common equity capital). Unless otherwise stated, it generally is assumed that this discount rate is applicable to net cash flow available to common equity

Question 25

NCF

Answer 25

Net cash flow to equity or to invested capital

Question 26

PV

Answer 26

Present Value

Question 27

Rf

Answer 27

Risk-free rate. The rate of return available in the market on an investment that is free of default risk.

Question 28

RPm

Answer 28

Equity risk premium for the “market” (large company premium). Usually used in the context of a market for equity securities, such as NYSE or S&P 500. Return in excess of risk-free rate.

Question 29

RPs

Answer 29

Risk premium for “small” stock (small stock premium), over and above RPm (e.g., average size of lowest quartile of NYSE as measured by market value of common equity).

Question 30

RPu

Answer 30

Risk premium for unsystematic risk attributable to the specific company (specific company risk).

Question 31

t

Answer 31

tax rate (expressed as a percentage of pretax income)

Question 32

Wd

Answer 32

Weight of debt in capital structure

Question 33

We

Answer 33

Weight of common equity in capital structure