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Corporate Valuation > Valuation > Flashcards

Valuation Flashcards

1
Q

Define Long-Term Debt

A

Debt that matures in more than one year

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2
Q

Define Current Liabilities

A

Financial obligations that are paid off within 1 year

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3
Q

What is another word for Current Liabilities

A

short-term debt

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4
Q

Where are current liabilities listed?

A

In the current liabilities portion of total liabilities on the balance sheet

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5
Q

7 uses for short-term debt

A
  1. Accounts payable
  2. short term loans
  3. commercial paper
  4. lease payments
  5. taxes due
  6. salaries and wages
  7. stock dividends
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6
Q

Define Risk Adjusted Discount Rate

A

An estimation of the present value of cash for high risk investments

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7
Q

What is the formula for risk adjusted discount rate

A

Risk-adjusted discount rate = Risk free rate + Risk premium

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8
Q

Define Risk Free Rate

A

The theoretical rate of return of an investment with zero risk

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9
Q

What is the formula to calculate risk-free rate

A

(Risk Free Rate) = (Yield of Treasury bond matching investment duration) – (inflation rate)

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10
Q

Define Risk Premium

A

investment return an asset is expected to yield in excess of the risk-free rate of return

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11
Q

What is the formula to calculate risk-free premium

A

Risk premium= (Market rate of return - Risk free rate) x beta of the project

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12
Q

What is the use for Beta

A

Measure the volatility of a security, as it compares to the broader market

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13
Q

What does a Beta > 1 indicate? What does a Beta < 1 indicate? What does a Beta = 1 indicate?

A

> 1: Investment is more volatile (riskier) than the overall market
< 1: Investment is less volatile than overall market
= 1: Investment carries same risk as overall market

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14
Q

What is the average Market Rate of Return of the S&P?

A

10%

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15
Q

Define Cost of Equity

A

the compensation the market demands in exchange for owning the asset and bearing the risk of ownership

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16
Q

What are the 5 steps of DCF Valuation?

A
  1. Estimate discount rate or rates to use in the valuation
  2. Estimate current earnings and CFs on the asset
  3. Estimate the future earnings and CFs
  4. Estimate when the firm will reach “stable growth” and what characteristics it will have when it does
  5. Choose the right DCF model for this asset and value it
17
Q

What is the difference between 10-K and 10-Q

A

10-Q is filed quarterly while 10-K is filed annually

18
Q

Which cashflows are used in Firm Valuation and which in Equity Valuation?

A

Firm: Pre-debt cash flow
Equity: After debt cash flows

19
Q

Which expected growth is used in Firm Valuation and which in Equity Valuation?

A

Firm: Growth in Operating Earnings
Equity: Growth in Net Income/EPS

20
Q

Define Terminal Value

A

The point at which a firm is in stable growth and grows at a constant rate forever

21
Q

Which Discount rate is used in Firm Valuation and which in Equity Valuation?

A

Firm: Cost of Capital
Equity: Cost of Equity

22
Q

True/False: A company in terminal value has a growth rate less than or equal to the economy

A

True

23
Q

Define “Free Cashflow to Equity”

A

The CF left over after every need has been met

24
Q

Define “Free Cashflow to Firm”

A

The CF before debt has been paid

25
Q

What does discount rate reflect?

A

Reflects the risk perceived by the marginal investor in the company

26
Q

Define Marginal Investor

A

the investor most likely to be trading at the margin and has the most influence on the pricing of its equity

27
Q

What are the three buckets of risks to use when determining Discount Rate

A
  1. Estimation vs. Economic Risks
  2. Micro vs. Macro risks
  3. Discrete vs. Continuous Risks
28
Q

Define Estimation and Economic Risks

A

Estimation: Risks associated to you not doing your research and not collecting enough data
Economic: Risks outside your control like the FED raising interest rates

29
Q

Define Micro and Macro Risks

A

Micro: Risks within a company (like who is running the company)
Macro: Risks outside the power of the company

30
Q

Define Discrete and Continuous Risks

A

Discrete: Risks that lie dormant for periods but then show up at points in time
Continuous: Risks that occur periodically

Corporate Valuation (2 decks)

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