P1.A.2.3 Asset Valuation - Investments

Question 1

Accounting for Equity Securities

P1.A.2.3 Asset Valuation - Investments

Answer 1

Fair Value Method

1. <20%
2. Change in FV: OCI
3. Dividends: income

Equity Method

1. 20%-50%
2. Changes are determined by investors share of investees net income & decreased by investors share of dividends
3. Dividend: cash & investment in XXX

Consolidation
1. >50%
Parent & Subsidiaries

Question 2

Time Value of Money
(Discounted Cash Flow)

(P1.A.2.3 Asset Valuation - Investments)

Answer 2

PV = FV / (1+k)n

PV = present value
FV = future value
k = interest or cost of capital
n = number of periods

Question 3

Debt Security Yield

P1.A.2.3 Asset Valuation - Investments

Answer 3

Yield = i / Pmkt

Par: $1,000
Coupon: 8%
Market value: $980
Interest: $80

Yield = $80/$980 = 8.16%

Question 4

Dividend Yield Ratio
(Discounted Cash Flow)

(P1.A.2.3 Asset Valuation - Investments)

Answer 4

= Annual dividend / Share price

Required return on equity

Question 5

Market Capitalization
(Levered Cash Flow)

(P1.A.2.3 Asset Valuation - Investments)

Answer 5

= Share price x # of Shares

Question 6

Price to Earnings Ratio
(Comparable Analysis & Levered Cash Flow)

(P1.A.2.3 Asset Valuation - Investments)

Answer 6

= Market capitalization / Net income after tax

= Share price / earnings per share (EPS)

Question 7

Enterprise Value
(Comparable Analysis)

(P1.A.2.3 Asset Valuation - Investments)

Answer 7

= Assets - retained earnings - paid in capital + market capitalization - cash & cash equivalents

Question 8

Weighted Average Cost of Capital (WACC)
(Discounted Cash Flow)

(P1.A.2.3 Asset Valuation - Investments)

Answer 8

=[(Debt % of capital) x (Debt yield) x (1 - tax rate)] + (Equity % of capital) x (required rate of return on equity)

Question 9

Levered Cash Flow
(Minority Investors)

(P1.A.2.3 Asset Valuation - Investments)

Answer 9

1. Net income after tax (NIAT)
2. Earnings before tax (EBT)
3. Levered free cash flow
4. Market capitalization
5. Price to earnings ratio

Question 10

Unlevered Cash Flow
(Majority Investors)

(P1.A.2.3 Asset Valuation - Investments)

Answer 10

1. Earnings before interest, taxes, depreciation & amortization (EBITDA)
2. Operating income
3. Unlevered cash flow
4. Enterprise value

Question 11

Comparable Analysis

P1.A.2.3 Asset Valuation - Investments

Answer 11

1. Price to earnings ratio
2. EBITDA
3. Enterprise value

Question 12

Discounted Cash Flow

P1.A.2.3 Asset Valuation - Investments

Answer 12

1. Weighted average cost of capital (WACC)
2. Divided yield
3. Time value of money
4. Capital asset pricing model

Question 13

Capital Asset Pricing Model
(Discounted Cash Flow)

(P1.A.2.3 Asset Valuation - Investments)

Answer 13

R = Rf + B (Rm-Rf)

R = expected return
Rf = risk free rate of return
Rm = market rate
Rm-Rf = market risk premium
B = Beta coefficient