Week 5 Dam 6,7 Flashcards
In relative valuation, we value an asset based on …
…how similar assets are priced in the market.
Price Earnings (PE) is:
PE = Market Price per Share / Earnings per Share
Other things held equal, higher growth firms will typically have …PE ratios than lower growth firms
higher
Other things held equal, higher risk firms will have … PE ratios than lower risk firms
lower
Other things held equal, firms with lower reinvestment needs will have … PE ratios than firms with higher reinvestment rates
higher
A low PE might mean the firm is (under/over)valued.
Undervalued
High expected growth in earnings might mean the firm is (under/over)valued.
Undervalued
Low reinvestments needs might mean the firm is (under/over)valued.
Undervalued
Fundamental PEG Ratio:
PEG*(1/g)
High risk companies will trade at … PEG ratios than low risk
companies with the same expected growth rate
lower
Low risk companies will trade at … PEG ratios than high risk companies with the same expected growth rate.
Higher
Companies with low reinvestment rates (that attain growth efficiently) will have … PEG ratios.
high
Companies with very low or very high growth rates will tend to have … PEG ratios than firms with average growth rates.
higher
𝑃𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝐷𝑃𝑆 / 𝐸𝑃𝑆
Cash Slack is…
When a firm with significant excess cash acquires a firm with great projects but insufficient capital, the combination can create value
Debt Capacity Synergy is achived by …
…By combining two firms, each of which has little or no capacity to carry debt, it is possible to create a firm that may have the
capacity to borrow money and create value
What are the 4 financial synergies that can be achieved?
- Diversification
- Cash Slack
- Tax benefits
- Debt Capacity
Claim: If there is synergy, the value of the combined firm should be greater than the value of the companies operating independently.
True,
Synergy should increase the combined firm value
Claim: Combining two firms with volatile earnings, will increase value because earnings will become more stable after the merger.
False.
Investors can diversify their portfolios themselves
Claim: The value of control is greater for a badly managed firm than for a well managed one.
True.
The value of control accrues from the changes that can be made in the firm after taking control of it
Claim: The empirical evidence suggests that merger gains are often overstated and fail to materialize in practice.
True
Claim: Firms generally become more profitable after mergers, relative to other firms in the industry.
False
Amortization in current year is…
0
Adjustment to operating income =
Investment in asset this year - Amortization of asset this year
