Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA II > Study Session 12 - Equity Valuation > Flashcards

Study Session 12 - Equity Valuation Flashcards

You may prefer our related Brainscape-certified flashcards:
CFA flashcards
1
Q

Which cash flow and rate used for firm valuation

A

FCFE @ required return on equity

Equity value= Firm value - market value of debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

General FCFF calculation

A

NI + Noncash charges + Interest * (1-tax rate) - Fixed Capital investment (capex) - Working Capital investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

1) General Fixed Capital Investment calculation
2) If no long-term assets were sold during the year
3) If long-term assets were sold during the year

A

1) capex - proceed from sales of long-term assets
2) capex = ending gross PP&E - beginning gross PP&E
3) capex - proceeds from sale of long-term assets OR ending net PP&E - beginning net PP&E + depreciation - gain on sale + loss on sale

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

FCFF calculation starting with CFO

A

CFO + interes*t(1-tax rate) FCInv

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

FCFE calculation starting with FCFF

A

FCFF - interest*(1-tax rate) + net borrowing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Calculating FCFF from EBIT

A

EBIT*(1-tax rate) + dep - FCInv - WCInc

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Calculating FCFF from EBITDA

A

EBITDA(1-tax rate) + dep tax rate - FCInv - WCInv

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Calculating FCFE from CFO

A

CFO - FCInv + net borrowing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What to do if the stock has preferred shares…

A

treat them just like debt, except preferred dividend are not tax deductible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Which cash flow and rate used for firm valuation

A

FCFF @ WACC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

FCFE vs Dividend discount model

A

FCFE takes a control perspective that assumes that recognition of value should be immediate

DDM take a minority perspective, under which value may not be realized until the dividend policy accurately reflects the firm’s long-run profitability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

2 methods of forcasting FCFE

A

1- apply a growth rate

2- using a target debt-to-assets ratio (DR)
FCFE= NI-(1-DR)(FCInv-Dep) - (1-DR)WCInv

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Effect of dividend, share repurchases, share issues, and changes in leverage on the future FCFE and FCFF

A

dividends, share repurchases and issues have no effect on FCFF and FCFE. Changes in leverage have only a minir effect on FCFE and no effect on FCFF

FCFF and FCFE represent cash flow available to investors and shareholders, respectively, before any financing decision

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

2 method for focasting the terminal value in a multistage valuation model

A

1) apply a stable growth rate FCF/(r-g)

2) use a valuation multiple like P/E
terminal value= trailing P/E* earning in year n
“””” = leading P/E * forecasted earnings in year n+1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Rationale for using P/E

A
  • earnings power
  • popular in the investment community
  • empirical research shiws that its differences are significantly related to long-run average stock returns
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Shortcomings of P/E ratio

A
  • earnings can be negative
  • the volatile, transitory portion
  • management discretion within allowed accounting practices
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Trailing and leading P/E

A

Trailing: Market price per shre/EPS past 12 mo

Leading: Market price per share/forecasted EPS over next 12 months

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

advantages of P/B

A
  • Book value is a cumulative amount that is usually positive, even when loss occur and negative EPS
  • more stable than EPS
  • approriate value of NAV fir firms that primarily hold liquid assets
  • approriate ratio for expected out of business firms
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

disadvantage of P/B

A
  • do not reflect the value of intangible economic assets
  • different accounting convention
  • inflation and technological change
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

P/B ratio

A

market value of equity/Book value of equity

book value of equity=
common shareholder’s
= total assets - total liabilities - pref. stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

advantage of P/S

A
  • meaningful even for distressed firms. always positive
  • not easy to manipulate sales
  • not as volatile as P/E
  • approriate for stocks in matire or cyclical industries and star-up with no records of earnings
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

disadvantage of P/S

A
  • high growth in sales does not necessaraily inducate high operating profit
  • dies nor capture differences in cost structure
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

advantage of P/CF

A
  • CF harder to manipulate than earnings
  • more stable than P/
  • handkes tge provlem of differences ibthe quality of reported earnings, which is a probkem for P/E
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Advantage of dividend yield D/P

A
  • commonly used for valuing indexes

- contributes to total investment return

25
Q

trailing D/P

leading D/P

A

trailing: 4*most recent quarterlu div/market price per share
leading: forecasted dividends over next four quarters/market price per share

26
Q

two method to normalize earnings

A

1- historical average EPS

2- average return on equity: Normalized EPS is eastimated as average ROE*BVPS. prefered because account for size effects

27
Q

justified trailing P/E calculation

A

P_0/E_0 = D_0*((1+g)/E_0)/(r-g)

= (1-b)*(1+g)/(r-g)

28
Q

justified leading P/E calculation

A

P_0/E_1= D_1/E_1/(r-g)
= (1-b)/(r-g)
or

Trailing P/E / (1+g)

29
Q

justified P/B calculation

A

(ROE-g)/(r-g)

30
Q

sustainable growth calculation

A

ROE*retention ratio

NI/SalesSales/assetsassets/equity*ret. ratio

31
Q

justified P/S calculation

A

(E_0/S_0)(1-b)(1+b)/(r-g)

32
Q

justified P/CF calculation

A

FCFF_0*(1+g)/(r-g)

33
Q

justified yield calculation

A

(r-g)/(1+g)

34
Q

three main limitation of a predicted P/E estimated from linear regression

A
  • The predictive power of the estimated P/E regression for a different time period and/or sample of stocks is uncertain
  • The relationship between P/E and fundame tal variables examines may change over time
  • multicollinearity is often a problem, difficult to interpret
35
Q

PEG ratio calculation

A

P/E ratio / g

36
Q

drawback of PEG

A

relationship between P/E and g is not linear, which makes comparisons difficult

doest not account for risk

37
Q

terminal calue in year n based on:

leading P/E

trailing P/E

A

justified leading P/E * forecasted earnings in year n+1

justified trailing P/E * forecasted earnings in year n

38
Q

adjusted CFO calculation

A

CFO+ bet cash interest outflow*(1-tax rate)

39
Q

entreprise value calculation

A

EV= market value of common stock + market value of preferred equity + market value of debt + minority interest - cash and investments

40
Q

EV/EBITDA is useful for:

A

may be more useful than P/E when comparing firms with different degrees of financial levrage

useful for valuing capital-intensive businesses with high levels of depreciatio/ amortization

usually positive even when EPS is not

41
Q

drawback of EV/EBITDA

A

if working capital is growing, it will overstate CFO

42
Q

earning surprise calculation

A

reported EPS - expected EPS

43
Q

standardized unexpected earnings (SUE) calculation

A

earnings surprise/standard deviation of earnings surprise

44
Q

the portfolio or index P/E is best calculated as….. weighted harmonic, mean, arithmetic, harmonic mean???

A

weighted harmonic mean P/E.

1/sommation(weight/(P/E))

page 213 volume 3

45
Q

economic value added (EVA) calculation

A

NOPAT-(WACC*total capital)

=

EBIT*(1-t)-$$WACC

46
Q

market value added (MVA) calculation

A

market value - total capital

47
Q

Residual income per share in year t calculation

A

E_t-(rB_t-1) = (ROE-r)B_t-1

48
Q

Intrinsic value of stock at time 0 using residual income

A

V_0= Book value_0 + RI1/(1+r)^1 + RI2/(1+r)^2 + RI3/(1+r)^3+….+RIn/(1+r)^n

49
Q

Value tends to be recognized earlier in the RI approach than in other present value-based approach. why?

A

because, for the other approach like DDM, a large portion of the estimated intrinsic value comes from the present value of the expected terminal value

50
Q

general formula for valuation with residual incone approach

A

V_0= Book value_0 + [(ROE-r)*B_0/(r-g)]

51
Q

Continuing residual income concept and calculation

A

it is the residuak income that is expected over the lobg term (kind of terminal value)

PV of continuing residual income in year t-1=
RI_t/(1+r-w)

where w= persistence factor (between 0, high persistence, and 1, no persistence)

52
Q

higher and lower persistence factor in the continuing residual income

A

higher: low dividend, historically high persistence in the industry
lower: high ROE, high accounting accruals, significant levels of nonrecurring items

53
Q

strenghts of residual income models

A
  • terminal value does not dominate the intrinsic value estimate
  • use easy-to-find accounting data
  • does not need dividend or positive and stable FCF in tge short run
  • focus on exonomic profitability
54
Q

weakness of residual income models

A
  • accounting data can be manipulated by management
  • numerous nd significant adjustment on accounting data
  • the model assume that the clean surplus hold
55
Q

Residual income models are not appropriate when:

A

clean surplus accounting relation is violated significantly

uncertainty concerning the estimates of book value abd return on equity

56
Q

accounting issues in applying residual income models

A 
clean surplus violations
variations from fair value
intangible asset effects on book value
nonrecurring items and other aggressive accounting practices
international accounting differences
57
Q

Discount for lack of control (DLOC) calculation

A

1-(1/(1+control premium))

58
Q

when we apply discount for lack of marketability (DLOM)?

A

when a interest in a firm cannot be easily sold

59
Q

total discount with DLOC and DLOM

A

total discount = 1-[(1-DLOC)(1-DLOM)]

CFA II (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions