Equity

Question 1

Residual Income and Toolbox

Answer 1

Toolbox:

1. Define RI
2. Calculate RI
3. Forecast RI (accounting stuff)
4. Understand basic model
5. RI-GGM Equivalent
6. 4 Continuing RI models (3 of them are one Fromula) –> between this and point 5 above, 5 operable models
7. Why does it not work?

Question 2

EVA & MVA

Answer 2

Question 3

Leading and Trailing P/E Fromula and Notes - FS1

Answer 3

Question 4

FCInv Buildup

Answer 4

Question 5

Pvt Company Valuation - DLOC and DLOM - WILL BE ON EXAM

Answer 5

Question 6

FCFE and FCFF - MEMORIZE

Answer 6

• Same as DDM, but use FCFE₁ (or FCFF?) / r-g instead
• FCFs not published, will need to calculate from stmts
• FCFE - USE REQUIRED ROE from CAPM instead of “r” from DDM
• FCFF - firm-wide, so use WACC (aka firm wide discount rate)
• REMEMBER: they’ll probably try to trip you up between FCFF and FCFE and which is the right one to use

Question 7

Estimating Beta

Answer 7

Question 8

Dividend Discount Models

Answer 8

• MOST questions on the exam from this slide
• DCF = for a non-control perspective
• FCFF / FCFE = for control perspective
• HP of N Years - just discount back holding and terminal cash flows
• GGM: AKA constant or infinite growth models
• Two-stage DDM:
  
  • Dividends, rsidual income, & FCF - use for all of these
  • DONT USE FORMULAIC APPROACH -> more of a prinpcle than a formula

Question 9

Residual Income Models - when RI fades over time

Answer 9

• No formula for omega - just how fast ROE will converge to r

Question 10

PEG Ratio

Answer 10

Question 11

FCF Supplementary Info Slide (non-mem)

Answer 11

Question 12

FCF 3 Crucial Things to know

Answer 12

1. FCInv Formula:
   
   • Given statement of cash flows (CFI)
   • From Balance Sheet:
     
     • FCInv = Ending net PPE - BGN net PPE + Depreciation - gain (loss) on sale of PPE
2. Remeber that WCInv = BGN WC - END WC
   
   1. It’s the CHANGE in WC we are interested in
3. Non cash charges (D&A), maybe impairments or change in DTL

Question 13

CAPM and Equity Risk Premium

Answer 13

• CAPM is MOST Used Formula on the exam!

Question 14

FCF Models

Answer 14

Question 15

Forecasting RI

Answer 15

Question 16

Calculate FCFF and FCFE from different Starting Points

Answer 16

• EBIT and EBITDA less likely - all lead to same place
• Don’t know what tehy give you - need to know how to extract from full statement
  
  • these help with abbreviated data
    *

Question 17

Problems of Residual Income Models

Answer 17

Question 18

Private Company Valuation - Table for Premium / Discount

Answer 18

Question 19

Estimating ROE and SGR (useful for DDM)

Answer 19

Question 20

FS1 - P/B Ratio

Answer 20

TRAILING ONLY

Question 21

FS1 - P/CF Ratio

Answer 21

TRAILING Only

Question 22

FS1 - P/S Ratios

Answer 22

TRAILING ONLY