Quiz 2 content Flashcards
Risk Free Rate formula
= Expected Inflation + Expected Real Interest Rate
Real Interest Rate is what borrowers agree to return to lenders in real goods/services.
Nominal GDP Growth
= Expected Inflation + Expected Real Growth
Real Growth in the economy measures the expected growth in the production of goods and services.
What economic factor is the 10 year treasury bond rate correlate with?
Nominal GDP Growth Rate
Present Value formula
Cash Flow /
(1 + discountRate)^period
If ROC is less than Cost of Capital, what will happen when a company grows faster.
The company will destroy value.
3 fundamental ways of growing
- Increase cashflow from existing assets
- Increase growth value
- Increasing the length of the growth period (i.e. maintaining competitive advantage)
In the Dividend Discount Model, what is the Expected Growth Rate formula?
= Retention Ratio * Return on Equity
In a FCFE model, what is the Expected Growth Rate formula?
= Equity Reinvestment Rate * Return on Equity
In a FCFF model, what is the Expected Growth Rate formula?
= Reinvestment Rate * Return on Capital
Reinvestment rate in stable growth formula
= stable growth rate / stable Return on Capital
Equity Reinvestment Rate formula (FCFE)
= (Net CapEx + Change in non-cash WC - Change in Debt) /
Net Income
Reinvestment Rate formula (FCFF)
= (Net CapEx + Change in non-cash WC) /
After-tax Operating Income
Non-cash ROE formula
= Net Income from non-cash assets /
BV of Equity - Cash
ROC or ROIC formula
= After-tax Operating Income /
BV of Equity + BV of Debt - Cash
