Sec A - External Valuation

Question 1

Time value of money

Answer 1

PV = FV / (1+k)^n

K = cost of capital

Question 1

Dividend Yield Method

Answer 1

P0 =D1 / (r – g)

P0 = price of stock today
D1 = next annual dividend per share
r = investor required rate of return
g = annual future growth rate of the dividend

Question 3

Levered Free Cash Flow (FCF) – for minority owners

Answer 3

Levered Free Cash Flow (FCF) – for minority owners

Cash from operations – Debt service – Capital Expenses

Question 4

Unlevered Free Cash Flow (FCF)

Answer 4

Unlevered Free Cash Flow (FCF) =

Cash from operations – capital expenditures

Question 5

Enterprise Value or Firm value — backs out historical value of assets

Answer 5

EV = Assets – Retained Earnings – Paid in Capital + Market Capitalization – Cash, Equivalents

Question 6

Discounted Cash Flow (DCF) or Dividend Yield Ratio

Answer 6

Dividend Yield Ratio = Annual Dividend / Share Price

14.5% = $5 / share price
14.5% x share price = $5
Share price = $5 / 14.5% = $34.48

Question 7

Price to earnings ratio (P/E)

Answer 7

Price to earnings ratio (P/E)

P/E = share price / earnings per share

P/E = Market capitalization / NIAT net income after tax
or

Question 8

Weighted Average Cost of Capital (WACC)

Answer 8

[ (Debt % of Capital) x (Debt Yield) x (1-tax rate) ]
+
[ Equity % of capital x required return on equity ]

Question 9

Capital Asset Pricing Model (CAPM)

Answer 9

Rs= Rrf + (β x (Rm – Rrf))

R (or sometimes k) = required return of the equity

Rrf = risk free rate, typically yield on government bonds

β = beta coefficient of the individual equity
Rm = expected return of the overall market

Question 10

Gordon Growth Model to calculate share price

Answer 10

Share Price = D / (Rs – g)

g = dividend growth expectation
D = dividend

Question 11

Regression Analysis (Forecasting)

Answer 11

y = a + bx

HP 12c:
a = enter (x,y) values using y x
then 0 2 [ x̂ , r ]  this computes value of a when x = 0 (i.e., y = a + (0*b))

b = [1]  [2] [ x̂ , r ]  [x⇔y]  [R↓]  [x⇔y]  [-]
this calculates values of y2 at x2, then swaps register values and moves them down so that you’re subtracting y2 – y1 to determine slope

Question 12

Operating vs finance leases

lessee disclosures

Answer 12

Operating:
✔️Rental expense each period
🚫Amount of future minimum lease payments
✔️ Total minimum rentals of non-cancellable leases

Finance:
✔️ Amount of future minimum lease payments
🚫 Rental expense each period
✔️Total contingent rentals incurred for the period

Question 13

The performance obligation is

satisfied over time if one of the following applies:

Answer 13

1. The benefit to the customer is received and consumed as the entity performs
2. The performance creates an asset that the customer controls
3. The performance does not create an asset with another benefit to the customer, and the entity has the right to payment for performance to date.

All other Performance obligations are satisfied at a point in time. 2014-9: 606-10-25-27)

Question 14

Operating loss carry forward — tax treatment?

Answer 14

An operating loss carry forward is a deferred tax asset because the loss can be deducted to offset taxable income in future years