Mock Exam - Improvement Points

Question 1

FCFF

Answer 1

= NI + Depreciation expense + (Int)(1-tax rate) - FCinv - WCinv

Question 2

FCFE

Answer 2

= FCFF - (int)(1-tax rate) + net borrowing

Question 3

Sustainable Growth Rate

Answer 3

the rate at which earnings (and div) can continue to grow indefinitely, assuming that the firm’s d-e ratio is unchanged and it doesn’t issue new equity.
= (1 - dividend payout ratio)(ROE)

Question 4

Valuing Equity using a FCFE model

Answer 4

= [FCFE x (1+g)] / (r -g)

Question 5

Real Growth Rate

Answer 5

= (1+nominal growth rate/1+inflation rate) - 1

Question 6

Direct Capitalization (RE Valuation)

Answer 6

= NOI/cap rate

*This gives you estimated sales price

Question 7

Applying The Cost Approach (RE)

Answer 7

1. Estimate the mkt value of the land
2. Estimate the building’s replacement cost
3. Deduct physical deterioration as well as functional, locational, and economic obsolescence.