EQUITY MODULE 43

Question 1

43.1 What is included in an initial company research report?

Answer 1

Question 2

43.1 What is included in subsequent company research reports?

Answer 2

Question 3

43.1 What are some key questions for analysts when understanding the business model?

Answer 3

Question 4

43.1 Revenue: What are top down and bottom up revenue drivers?

Answer 4

Question 5

43.1 Revenue: how do we consider pricing power?

Answer 5

Question 6

43.1 Why do the nature of fixed vs variable costs have serious implications for forecasting profit?

Answer 6

fixed = is the same no matter how much profit.
- so the proportion of the fixed costs varies depending on how much profit is made.
- fixed costs in a downturn may become problematic as they start to make up a higher portion

Question 7

43.1 what is operating leverage?

+ what is the equation for DOL!

Answer 7

DOL - degree of operating leverage

This looks at the impact of the fact that there are fixed costs.

So we look at how the profit changes relative to how the sales change

Question 8

43.1 what does ‘contribution’ mean in analysis?

• how do we calculate it

Answer 8

It normally references the variable element of profit =

Selling Price minus all the Various Costs involved

Question 9

43.1 Name some examples of fixed and variable costs?

Answer 9

Question 10

43.1 How would you calculate an estimate of operating profit?

Answer 10

Volume x (Sales - V.C) - Fixed Costs

Question 11

43.1 Output is the major driver of profitability: describe the difference between economies of scale and scope:

Answer 11

Question 12

43.1 JUST A NOTE - CCC IS ALSO IMPORTANT HERE

KNOW HOW TO CALCULATE

Answer 12

retailers often have a negative CCC - they sell before paying suppliers

Question 13

43.1 Capital investments and Capital structure: What are some sources of capital?

Answer 13

Question 14

43.1 Capital investments and Capital structure: What are some uses of capital?

Answer 14

Question 15

43.1 What is DFL, and what is the formula for it?

Answer 15

Degree of financial leverage

very similar in idea to the DOL - but is looking at the impact of having debt and the impact of having interest on debt

DFL magnifies the effect of interest on operating profit through to net income

Changes in revenue here, good or bad, will multiply up by both fixed costs and interest to have a big outcome

Question 16

43.1 What is ROIC? And what is the formula for this?

Answer 16

Still excludes cats and investments!

Profit measure BEFORE FINANCE

and and asset measure which takes all sources of long term finance

Question 17

43.1 We have economic profit if ROIC > _______

Answer 17

WACC

Question 18

43.1 What is ROE? What is the equation for it? (DuPont)

Answer 18

LEVERED RETURNS - because it is only equity it is impacted by the financing choice

NOTE - of the interest and tax burden, the closer we get to 1, the less interest or tax is being paid

Question 19

43.1 In what form is Markey share presented?

Answer 19

is a ratio! not a dollar amount