Part III-8 Using Sustainability Data in Financial Valuation Flashcards
The XX rate is used when discounting future cash flows to their present value
discount rate
The XX rate is used when going from the present to the future value
interest rate
What is the cash left over after the company spends what is necessary to keep growing at its current rate?
Free cash flows
What is the cost of a company’s funds - how much it costs to borrow, or the rate of return required by investors to justify investment, given the risk
Cost of capital
T/F - All else being equal - a risky company’s future cash flows are worth less (in terms of present value) than those of a stable, predictable company
True
What is the value of a company beyond the period in which future cash flows can be estimated?
Terminal value
How can increased revenue from products designed for use-phase resource efficiency help identify cash flows in the Chemicals industry?
Companies that develop cost-effective solutions to address customer desires for more efficient products may benefit through increased revenue, as such products are likely to allow for price premiums and higher sales
What is operating free cash flow?
Net operating profit after tax (NOPAT)
T/F - Lower costs (due to energy efficiency, etc. ) can increase projected net cash flows
True
T/F - SASB standards often lend insight into losses related to fines and settlements and the price of key inputs for value creation
True
T/F - When an asset is less useful for generating revenues, it reduces expected cash flows
True
What is the impact on capital expenditures if a company is facing GHG emissions regulations and restrictions on coal generation?
1- If a company plans to transition some coal-fired generators to other less carbon intensive fuel sources, an analyst may adjust CapEx forecasts up and assume lower depreciation rates
2- If the company used strictly coal-fired generators, these may face faster depreciation due to need to dispose under GHG emissions regulations
What is an example of an on balance sheet intangible asset?
Goodwill related to a brand
What is an example of an off balance sheet intangible asset?
The difference between book value and market value of a firm
To understand impacts on company value and to manage value accordingly as it relates to off balance sheet impacts on company value, users must have a robust understanding of what?
Company’s value creation model;and
The non-financial factors that drive performance
Poor management of community relationships is an example of what?
Off balance sheet intangible
T/F - Intangible value is often quantitative in nature
False - qualitative
T/F - increases in ESG-related liabilities decrease a company’s net working capital, thus reducing future cash flows -
True
In DCF, increased risk equates to (increased/decreased) discount rate and, all else being equal, (lower/higher) valuation
increased, lower
Disclosures on operational performance data usually have impacts on XX
- expenses and/or revenues (i.e. how you manage your business and associated revenues and costs)
Disclosures on current financial position usually have impacts on XX
asset and liabilities (assets i.e. valuation of certain assets, capital expenditures, which may make it harder/easier to do business); or liabilities, legal fines which may show up as expenses and increase cost of capital
The XX is weighted according to the proportion of overall financing it provides to the company (i.e. if debt interest rate is 10% and it provides 60% financing, the cost of capital is 6% - plus the cost of equity)
cost of capital
What is the measure of the volatility of a company (or stock)?
Beta
T/F - Beta of >1 indicates that the company’s stock price is more volatile than the market - more volatility suggests higher risk -
True
T/F - Beta of <1 indicates that the company’s stock price is less volatile than the market - less volatility suggests lower risk
True
the difference between the yield of a security at the risk-free rate of capital and that of another debt security with the same time to maturity but different, riskier credit quality
Credit spread
Where a borrower is less likely to be able to repay its debt, the lender will require a XX rate and, all else being equal, the credit spread will be XX. higher
higher, higher
How are green bonds and sustainability-linked bonds different?
Thematic green bonds are typically used to fund specific projects with sustainability outcomes,whereas sustainability-linked debt financing instruments are used by lenders to incentivize the sustainability performance of the borrower itself.
What channel of impact is the following? Through market share and pricing power. Often: Progressive High probability Near to medium term Direct
Revenues
What channel of impact is the following? What is an example, and how can it impact fundamental analysis?
Impact on intangible assets (brand). Often:
Progressive
High probability
Long term
Indirect
Revenues - intangible assets; example ratio of diversity at the company; can impact intangibles through reputation and ultimately revenue growth
What channel of impact is the following?
Impact on operational efficiency and costs. Often:
Progressive
High probability
Near term
Direct
Expenses
What channel of impact is the following? Assets and Liabilities Impact on valuation. Often: Progressive Low to high probability Long term Direct
Assets and Liabilities
What channel of impact is the following?
Impact on (i) operational risks/cost of capital and (ii) one-time costs and contingent liabilities. Often:
Acute
Low probability
Near to medium term
Direct
Cost of Capital
