Investment/ Equity Research Questions Flashcards
What is the difference between equity value and enterprise value?
Enterprise Value incorporates the value of net debt. Equity value is simply the market cap of the company.
What are the most common ratios used to analyze a company?
- Solvency ratios.
- Turnover ratios.
- Operating efficiency ratios.
- Operating profitability ratios.
- Business risk.
- Financial risk.
Walk me through the steps of performing a discounted cash flow analysis?
What is Free Cash Flow to the firm?
it’s the excess cash generated after working capital and the cost associated with maintaining and renewing fixed assets.
This goes to the equity and debt holders.
What is Free Cash Flow to equity?
Measures how much cash a company can return to its shareholders. It is calculated after taking care of taxes, capital expenditure, and debt cash flows.
What are the limitations to Free Cash Flow to equity?
It does not accurately measure cash flows if the leverage used is volatile. It cannot be applied to companies with changing debt leverage.
How would you perform sensitivity analysis in equity research?
Find two important variables from the base case assumptions. Create a data table in excel. e.g. WACC and growth rates.
What are the most common multiples used in valuation?
EV/Sales
EV/EBITDA
EV/EBIT
PE Ratio
PEG Ratio
Price to Cash Flow
P/BV Ratio
EV/Assets
How do you find the Weighted Average Cost of Capital for a company?
WACC = (weight of debtcost of debt (1-tax rate))+(weight of equitycost of equity) +(weight of preferred shares*cost of preferred shares)
What is the difference between trailing and forward PE?
Trailing PE uses the company’s actual trailing twelve months earnings and the forward PE uses forecasted earnings.
Can Terminal Value be negative?
Yes. Theoretically.
If you were a portfolio manager with 10 million how would you invest it?
Why might the PE ratio of a high tech company be higher than the PE ratio of a mature company?
It is more helpful to use PEG Ratio for high growth companies. The higher tech company likely has higher expected growth.
What is Beta?
Beta is the standard deviation between a company’s stock price and the overall market. Historical regression. 1= equal to the market. >1 more volatile than the market. <1 = less volatile than the market.
Which is better EBIT or EBITDA?
EBIT because it treats depreciation and amortization as no-cash expenses whereas EBITDA does not. EBITDA doesn’t account for the cost of debt and the tax effects that has.
