Valuation (Advanced)

Question 1

Money worth more than yesterday?

Answer 1

Yes - 1) inflation 2) invest money today and earn more next year

Question 2

Discount rate?

Answer 2

= Opportunity cost - how much you can earn with your money elsewhere. Min rate of return needed for investment

Question 3

Why do we prefer equity value over enterprise value for FIG?

Answer 3

Difficult to define debt to get to enterprise value

Question 4

Why do we use P/BV and P/E

Answer 4

• Balance sheet centric making P/BV more relevant - 1x more common
  -P/E interest is very important in FIG industry so we must account for interest and use Net Income over EBITDA/EBIT

Question 5

Why is ‘Free Cash flow’ meaningless for FIG and what do we use instead?

Answer 5

FCF meaningless because capex is minimal and working capital changes can be different. So DIVIDENDS are used as proxy for cash flow
-Difficult to separate operating, investing and financing activities

Question 6

What do we use instead of DCF

Answer 6

Dividend discount model

Question 7

What is Free cash flow to firm?

Answer 7

FCFF is the cash available to all stakeholders generated from the core operating assets after accounting for expenses and long-term investments to keep it operating

Question 8

FCFE? Free cash flow to equity holders?

Answer 8

FCFE represents the free cash flow available to equity stakeholders once operating expenses, investments and financing related expenses taken care of