Lecture 4

Question 1

What is the weighted average expected return

What is the formula for the expected return

what is the unusual part of the return

How is the expected return different from the required return,

What is the implied expected return

Answer 1

Weighted-average return, the expected return is a weighted average of the forward ROCE and growth, where the weights are given by book to price

Look at the formula sheet

you use the ROCE in the one period forward, therfore you might require the forward earnings to calculate ROCE

The ER is the expected return to buying at the current market price, not the required return.

Implied expected return is with the historical growth rate.

Question 2

What is the fundamental accounting identity and explain each variable

Answer 2

C - I = d + F

C = Net cash from operations 
I = Net cash outflow for investing in operating assets NOT financial assets 
C-I = Free cash flow 
d= Net dividends (common dividends + Share repurchase - Share issues ) 
F = Net cash outflow to debt holders and debt issuers

Question 3

What is the treasurers rule

Answer 3

If C - I - i > d : Lend or buy down (reduce) own debt (C - I - i - d > 0 = surplus cash )
If C - I - i

Question 4

What is the formula for NOA

What is the formula for NFO

How is CSE linked with NOA and NFO

Answer 4

NOA = OA - OL

NFO = Financial obligation - Financial assets

CSE = NOA - NFO