Hugtakið virði
Instrinic Value (eiginlegt virði, innra virði)
Ekki alltaf jafnt markaðsvirði
- Fair value/fair market value (markaðsvirði)
Eðlilegt verð sem kaupandi og seljandi eru sáttir með á markaði
- Investment Value (fjárfestingavirði)
Þegar kaupandi hefur aukið virði af eign umfram kaupverð.
Going concern value
Virði fyrirtækis þar sem forsenda er gerð um áframhaldandi rekstur um ókomna tíð.
Liquidation Value
Virði fyrirtækis þar sem því er slitið og einstaka eignir seldar.
Verðmat
Intrinsic value: Virði m.v. fullkominn skilning á eign.
- Gerir venjulega ráð fyrir að félagið sé going concern
- Intrinsic value er ekki jafnt market price
Mispricing á markaði
Virkir fjárfestar reyna að nýta sér mispricing á markaði.
- Virkir fjárfestar verða að trúa því að markaðurinn átti sig á mistökum sínum og rétti sig af.
Önnur not verðmats
Finna væntingar markaðarins, meta viðskiptamódel og atburði, verðmat á óskráðu félagi, samskipti milli
hluthafa og stjórnenda, kaupréttir starfsmanna,
Verðmatsferlið
Skref: Greining á atvinnugrein go samkeppni, áætlunargerði, val verðmatsaðferðar, verðmat, ráðlegging
um viðskipti (buy/sell/hold).
Greining á atvinnugreininni: samkeppnisaðilar, nýir aðilar á markaði, staðkvæmdarvörur, etc.
Gæði afkomu (quality of earnings) eru mjög mikilvæg. Hversu mikil gæði hagnaðar, viljum að gæði
hagnaðar sé mikill og rétt uppgefinn og rétt reiknaður.
Holding period return
Sú ávöxtun sem fæst af eign yfir ákveðið tímabil
- Gengishagnaður + hverskyns greiðslur (t.d. arðgreiðslur).
Ávöxtunarkrafa
Sú lágmarkskrafa um ávöxtun sem fjárfestir gerir til fjárfestingar fyrir ákveðið tímabil (yfirlett á
ársgrundvelli).
Áhættuálag hlutabréfa - Equity risk premium, ERP
Áhættuálag sem fjárfestar gera kröfu um ofan á áhættulausa ávöxtun þar sem hlutabréf eru aftast í
kröfuhafaröðinni.
CAPM
Reiknar út ávöxtunarkröfu hlutabréfs og notar til þess risk-free kröfuna, equity risk premium og fylgni
hlutabréfsins við markaðinn erða svokallaða betu, B
E(Ri) = Rf + Bi(E(Rm) - Rf)
E(Ri) = vænt ávöxtun hlutabréfsins í jafnvægi
Rf = risk-free rate
Bi = beta hlutabréfsins
Rm = ávöxtun hlutabréfamarkaðarins.
Betan er mikilvægur þáttur í CAPM og er notuð til að finna hversu mikla ávöxtun við gerum til hluthafa.
Beta
- Mælir fylgni ávöxtunar hlutabréfa við samanburðarvísitölu.
- fræðilega séð hefur markaðurinn B = 1, enda hefur hann fullkomna fylgni við sjálfan sig.
- Hlutabréf sem hefur B = 2, sveiflast tvöfalt meira en markaðurinn að meðaltali.
- Hlutabréf sem hefur betuna B = 0,5, sveiflast helmingi minna en markaðurinn að meðaltali.
- Betan er notuð til að finna hversu háa ávöxtunarkröfu við gerum til hlutabréfs til að bæta upp fyrir
áhættu bréfsins m.v. markaðinn.
WACC
Wighted average cost of capital mælir heildar ávöxunarkröööfu félags m.v. uppsetningu skulda og
eiginfjárhliðar þess.
WACC = wd * rd(1-T) + we * re
wd = vigt skulda
rd = vaxtakostnaður
T skatthlutfall (20% á Íslandi)
we = vigt eiginfjár
re = fjármögnunarkostnaður eiginfjár.
Ath: wd + we er alltaf 100%
Equity risk premium - Áhættuálag hlutabréfa
Required on equity - Risk free return
- sögulegt mat
- álitamál við sögulegt mat: lengd tímabils, geometric vs. artihmetic meðaltal, val á risk-free rate,
survivorship bias, óvenjulegir atburðir (bólur, kreppur).
- Forward looking nálgun: Gordon growth model mat, macroeconomic módelið,skoðanakannanir meðal
analysta.
Líkön til að reikna ákvöxtunarkröfu hlutabréfa
- Capital asset pricing model (CAPM)
- Fjölþáttalíkön => Fama french líkanið, hagfræðilíkön (marcroeconomic model), tölfræðilíkön.
- Build- up aðferðin.
Álitamál við mat á Betu
-Val á samanburðarvísitölu
- Lengd og tíðni gagna
- Adjusted beta
- Óskráð félög og félög með lítil viðskipti.
Alþjóðleg álitamál fyrir ávöxtunarkröfu
- Gengi
- Nýmarkaðir
Weighted Average Cost of Capital - WACC
-Notum ávöxtunarkröfu hlutabréfa, skatthlutfall, vaxtakostnað og uppsetningu efnahagsreiknings.
Val á afvöxtunarstuðli - discount rate
- Notum WACC fyrir sjóðstreymi til fyrirtækis (FCFF)
- Notum ávöxtunarkröfu hlutabréfa fyrir sjóðstreymi til hlutabréfa (FCFE)
- Notum nafnvirðiskröfu til að reikna sjóðstreymi á nafnverði.
Arðgreiðslulíkön
-Eru heppileg þegar fyrirtæki greiða arð og hafa gert í smá tíma, best fyrir fyrirtæki sem eru orðin mjög
þroskuð.
- Eigendur hlutabréfa geta hagnast á hækkun hlutabréfaverðs og arðgreiðslum.
- Mörg fyrirtæki greiða arðgreiðslur til hluthafa sinna. Önnur fyrirtæki hafa annaðhvort ekki burði til þess
eða kjósa að nota peninginn í innri vöxt félagsins.
- Arðgreiðslur fyrirtækja geta haft mjög mikil áhrif á verðmat þeirra.
- Mörg fyrirtæki setja sér arðgreiðslustefnu og miða við útgreiðsluhlutfall af hagnaði.
Arðgreiðslulíkön
-GGM útfærir DDM líkanið á þann hátt að gert er ráð fyrir föstum vexti g, á arðgreiðslum til eilífðar.
-GGM er mikilvægast og er einfalt í uppsetningu og notað í mjög margt, t.d. finna eilífðarvirði í FCF
Gordon growth módelið
- í GGM þarf r > g, þ.e. liðurinn undir striki má ekki vera í mínus ( þá kemur furðuleg niðurstaða).
- Líkanið reiknar arðgreiðslu næsta tímabils og núvirðir það til eilífðar (perpetuity) með sömu
ávöxtunarkröfu og vexti (growth) á hverju tímabili.
- Forsendan um fastan vöxt í arðgreiðslum til eilífðar er ekki líkleg í raunveruleikanum, en um er að ræða
einfalt módel sem auðvelt er að reikna fyrir félög sem greiða arð.
Arðgreiðslulíkön
-Við getum líka reiknað út P/E hlutfallið (price to earnings) með GGM
- Leading P/E (byggt á earnings næsta 1 árs)
Po/E1 = (1-b)/(r-g)
- Trailing P/E (byggt á earnings síðasta 1 árs)
Po/Eo = (1-b)(1+g)/(r-g)
(1-b) = Dividend payout ratio, arðgreiðsluhlutfall
P = hlutabréfaverð
E = earnings, hagnaður
Arðgreiðslulíkön
-H líkanið gerir ráð fyrir vexti sem byrjar hátt og lækkar svo línulega með tímanum þar til það nær
stöðugum eilífðarvexti í lokin.
Vo = Do(1+gL) + DoH(gS - gL)/r-gL
Vo = virði bréfa
Do = Arðgreiðsla í dag
gS = Vöxtur til skamms tíma
gL = vöxtur til eilífðar
H = helmingur ára í hröðum vexti.
Yfirleitt eru allar forsendur gefnar.
Val á núvirðingalíkani
- Arðgreiðslulíkan (DDM), free cash flow líkön og residual income líkön.
- Arðgreiðslulíkan á best við þegar:
- Þroskuð, arðbær og arðgreiðandi félög
- Þegar noncontrolling hluthafi á í hlut.
Gordon Growth model
-Gerir ráð fyrir föstu g og r > g
- Á við þroskuð og stöðug félög
Niðurstaðan er mjög viðkævm fyrir (r-g) nefnaranum.
Notkun á Gordon growth model
-Hægt að verðmeta preferred stock (g=0)
-Hægt að reikna P/E hlutföll
-Hægt að finna út r and g
Stig vaxtar
-Vöxtur
-Umbreyting
-Þroski
Þrepaskipt líkön
- Tveggja þrepa líkan: Vöxtur lækkar hratt
- H- líkanið: vöxtur lækkar smám saman
- Þriggja þrepa líkan: hægt að nota almennt eða H-líkan.
Sustainable Growth Rate
-g=Retention ratio * ROE
-DuPont Líkanið
ROE = Profit margin * Asset turnover * Equity multiplier.
Free Cash Flow
-Með FCFE er átt við það sjóðstreymi sem félag á eftir til eigenda almennra hluthafa þegar allur
rekstrarkostnaður hefur verið greiddur ásamt nauðsynlegum fjárfestingum í veltufjármunum (t.d.
birgðum) og fastafjármunum (t.d. framleiðslutækjum) auk afborgana til lánveitenda.
-Með FCFF er átt við það sjóðstreymi sem félag á eftir til handa lánveitendum og hluthöfum þegar allur
rekstrarkostnaður hefur verið greiddur ásamt nauðsynlegum fjárfestingum í veltufjármunum (t.d.
birgðum) og fastafjármunum (t.d. framleiðslutækjum
Free Cash Flow
-Mikilvæg forsenda í núvirðingu á FCFF og FCFE er vöxtur til framtíðar (skamms og langtíma).
Eins og í Gordon Growth líkaninu með fastan vöxt kallast þetta single-stage FCFF og FCFE model
Net income
-Með net income er átt við þann hagnað sem verður af starfsemi fyrirtækis. Net income er niðurstaðan í
rekstrarreikningi
Noncash charges
-Með noncash charges er átt við færslur í sjóðstreymi sem hafa ekki áhrif á handbært fé. Algengastar
slíkra færslna eru afskriftir og niðurfærslur eigna.
Investment in fixed capital
-Með investment in fixed capital er átt við fjárfestingaþörf í fastafjármunum, svosem verksmiðjur eða
framleiðslutæki.
investment in working capital
-Með investment in working capital er átt við nettó fjárfestingaþörf í rekstrarfjármunum, þ.e.
veltufjármunir (fyrir utan cash) - skammtímaskuldir (óvaxtaberandi).
EBITDA
-EBITDA þýðir earnings before interest, taxes, depreciation and amortisation, þ.e. hagnaður fyrir vexti,
skatta, afskriftir og niðurfærslur.
EBIT
-EBIT þýðir earnings before interest and taxes, þ.e. hagnaður eftir afskriftir en fyrir fjármagnsliði.
EBT
-EBT þýðir earnings before taxes, þ.e. hagnaður fyrir skatta og eftir afskriftir og fjármagnsliði.
Free Cash Flow
-Algengast er að reikna FCFF og FCFE út frá net income eða CFO.
-Það er líka hægt að reikna FCFF og FCFE út frá EBIT og EBITDA:
FCFF = EBIT * (1 - Tax rate) + Dep - FCInv - WCInv
FCFF = EBITDA * (1 - Tax rate) + Dep(Tax rate) - FCInv - WCInv
Þá má í framhaldi reikna FCFE út frá FCFF eins og áður:
FCFE = FCFF - Int * (1 - Tax rate) + Net borrowing
FCFF vs FCFE
-FCFF = Sjóðstreymi til handa bæði hluthöfum og lánveitendum
-FCFE = Sjóðstreymi til handa almennum hluthöfum
FCFF er ákjósanlegra þegar FCFE er neikvætt eða þegar capital strúktúrinn er óstöðugur
Verðmat hlutafjár með FCFF og FCFE
-Núvirðum FCFF með WACC
-Núvirðum FCFE með ávöxtunarkröfu hlutafjár
Equity value = PV(FCFF) - virði skulda
Equity value = PV(FCFE)
Álitamál í FCF greiningu, Leiðréttingar við útreikninga FCF
-Afskriftir, greiðslur vegna endurskipulagningar, fjárhagslegt tap/hagnaður, valréttir starfsmanna,
skattalegar eignir
Nálganir við útreikninga FCFF og FCFE
-Hægt að reikna út frá:
Hagnað (net income)
EBIT
EBITDA
Sjóðstreymi frá rekstri (CFO)
Notkun
Breyting í handbæru fé og nettó greiðslur til lánveitenda og hluthafa
Álitamál í FCF greiningu
Misræmi í fjárhagsupplýsingum
Arðgreiðslur vs frjálst sjóðstreymi
Sjóðstreymi til hluthafa og skuldsetning
FCFF og FCFE vs EBITDA og Net income
Leiðréttingar vegna lands
Næmnigreining
Órekstrarlegar eignir
Að áætla FCFF og FCFE
-Áætlun tekjuvaxtar
-Forsenda um að EBIT hlutfall, FCInv og WCInv séu hlutfallslegir liðir m.v. tekjur
-Fyrir FCFE, gerum ráð fyrir að skuldahlutfall sé fast
FCF Verðmatslíkön
-Tveggja þrepa með mismunandi vexti í hverju þrepi
- Þriggja þrepa líkan
Residual income
-Residual income er sú afkoma sem verður til eftir að dreginn hefur verið frá fórnarkostnaður almennra
hluthafa.
-Það er sú afkoma sem verður til eftir að reiknað hefur verið með öllum fjármögnunarkostnaði (skuldum
og hlutafé).
-Fyrirtæki getur haft jákvæða afkomu en samt ekki búið til virði fyrir hluthafa ef afkoman dugir ekki fyrir
ávöxtunarkröfu hluthafanna.
-Fyrirtæki sem býr til afkomu umfram það sem þarf til að greiða fyrir fjármögnun er að skapa virði.
Residual income
-Til að reikna út Bt á hverju tímapunkti getum við gefið okkur eftirfarandi samband:
Bt = Bt-1 + Et - Dt
Þetta kallast clean surplus relation. Til að reikna út Bt, þ.e. bókfært virði eigin fjár, má finna bókfært eigið
fé á t-1, leggja við þá afkomu (E) sem hlýst á tíma t og draga frá arðgreiðslur (D).
Residual income
-Residual income reiknar fyrr með arðsemi en DDM og FCF.
Þyngd núvirðis FCF og DDM er eilífðarvirðið í lokin á meðan þyngd núvirðis residual income er bókfært
eigið fé í upphafi.
Styrkleikar Residual income
-Eilífðargildi eru ekki stór hluti heildar núvirðis m.v. önnur módel.
-Residual income módel nota bókhaldsgögn sem eru til.
-Hægt að verðmeta félög sem greiða ekki arð eða hafa ekki jákvætt sjóðstreymi til skamms tíma.
Veikleikar Residual income
-Stjórnendur geta bjagað bókhaldsgögn og mögulega þarf að laga þau töluvert til áður en þau eru notuð.
-Gerð er forsenda um að clean surplus relation eigið við.
-Gerð er forsenda um að kostnaður skulda sé rétt endurspeglaður í vaxtagjöldum
Bókhaldsleg álitamál
-Þar sem residual income model reiðir sig að mjög miklu leiti á bókfært virði eigin fjár er mikilvægt að
átta sig á því hvort það virði sé „rétt" bókað í reikningum félagsins.
Oft þarf að leiðrétta book value fyrir off-balance-sheet items.
Eignir og skuldir þarf að færa yfir á fair value þar sem við á.
Ýmsir liðir fara oft framhjá rekstrarreikningnum.
Gengismunur gjaldmiðla.
Breytingar í fair value á ákveðnum fjármálagerningum.
Ýmsar lífeyrissjóðslagfæringar (einkum í erlendum félögum).
Útreikningur birgða (LIFO er ekki leyfilegt undir IFRS).
Skattalegar eignir og skuldir
Residual Income, Afgangsafkoma eftir að allur kostnaður fjármagns hefur verið dreginn frá
-Hagnaður - (Ávöxtunarkrafa eigin fjár * Bókfært eigið fé) = (ROE - Ávöxtunarkrafa eigin fjár) * Bókfært
virði eigin fjár
Nátengt EVA og MVA
Virði eiginfjár = bókfært eigið fé + PV (residual income)
-Hægt að reikna með eins þrepa og fjölþrepa líkönum
-Hægt að notast við "persistence" breytu (V)
-Fyrirtæki með sterkari markaðsstöðu munu hafa hærri persistence breytu
Miðað við aðrar verðmatsaðferðir
-Gagnlegt þegar félag greiðir ekki arð eða hefur neikvætt free cash flow
-Minni áhersla á framtíðarsjóðstreymi
Notkun bókhaldslegra gagna
-Gerir forsendu um að "clean surplus relation" haldi
-Gæti þarfnast leiðréttinga á ýmsum bókhaldslegum upplýsingum
Verðmatskennitölur
-Verðmatskennitala er ein tala sem verður til fyrir ákveðið fyrirtæki.
Þessi tala segir mjög lítið nema hún sé borin saman við önnur sambærileg félög.
Slíkur samanburður segir margt um hvernig fyrirtæki er verðmetið á markaði m.v. undirliggjandi þætti
þess í rekstri eða efnahagsreikningi.
Þau félög (eða hópur þeirra) sem við notum til samanburðar eru kölluð comparables.
Verðmatskennitölur
-Þegar við finnum samanburðarfélög þarf að hafa ýmislegt í huga:
Að félögin séu í sambærilegum rekstri, þ.e. svipaðar markaðsaðstæður hafi svipuð áhrif á verðið.
Að félögin hafi svipaða arðsemi og vöxt.
Að félögin séu svipuð að stærð og markaðshlutdeild svipuð.
Að fjárhagskennitölur séu svipaðar, þ.e. félögin séu t.d. svipað skuldsett eða fjármögnuð á svipaðan hátt.
Price to earnings, P/E.
-Vinsælasta verðmatsaðferðin.
-Price per share/ earnings per share (EPS) = P/E
Verðmatskennitölur P/E
-Eins og við komum áður örlítið inn á er ákveðið samband á milli P/E og Gordon Growth Model (GGM) og
hægt að skrifa P/E á eftirfarandi hátt:
Leading P/E (byggt á earnings næsta 1 árs):
Trailing P/E (byggt á earnings síðasta 1 árs):
PEG hlutfallið
PEG, eða P/E-to-growth hlutfallið tekur tillit til áhrifa vænts vöxt í afkomu fyrirtækis og er reiknað svona
(g er væntur vöxtur):
Hlutabréf með lágt PEG gildi eru almennt álitin vænlegri fjárfestingakostur en hlutabréf með hátt PEG
gildi.
Hafa verður þó eftirfarandi í huga:
PEG gerir ráð fyrir línulegu sambandi P/E og vaxtar, en það er sennilega ekki raunin.
PEG tekur ekki tillit til áhættu.
PEG tekur ekki tillit til mismunandi vaxtar til skamms og langs tíma
Verðmatskennitölur, P/B ---Price to book, P/B
Einnig mjög vinsæl, sögulega jafn vinsæl og P/E.
Á meðan P/E notast við tölu úr rekstri félags notast P/B við tölu úr efnahagsreikningi þess.
Bókfært eigið fé á hér að endurspegla nokkurn veginn það sem fjárfestar hafa lagt í fyrirtækið.
Til að finna bókfært eigið fé til almennra hluthafa (sem er það sem við notum í P/B) byrjum við á að finna
samtals bókfært virði eigin fjár með því að draga samtals skuldir frá samtals eignum. Því næst drögum
við frá það sem er eyrnamerkt eigendum forgangshluta (preferred shares).
Lagfæringar á book value
-Óáþreifanlegar eignir
-Birgðabókhald
-Atriði utan efnahagsreiknings
-Fair Value
Verðmatskennitölur P/B
-Eins og P/E hefur P/B líka ákveðið samband við GGM þar sem hægt er að skrifa P/B á eftirfarandi hátt:
Þetta er einnig kallað justified P/B
Verðmatskennitölur P/S
-Price to sales, P/S
P/S verðmetur félög út frá tekjum þeirra.
Með „sales" er átt við nettó tekjur per hlut, þ.e. samtals sölu mínus skilaðar vörur og afslættir
viðskiptavina.
Analystar nota venjulega árstekjur 1 ár aftur í tímann. Einnig má reikna væntar tekjur næsta 1 ár fram í
tímann.
Verðmatskennitölur P/S
-Eins og með P/E og P/B hefur P/S ákveðið samband við GGM þar sem hægt er að skrifa P/S á eftirfarandi
hátt:
Hér er E0/S0 profit margin félagsins.
Verðmatskennitölur - Dividend yield
-D/P er stundum notað og gefur okkur svokallað dividend yield.
Rök með D/P eru m.a. að það gefur vísbendingu um heildarafkomu.
Rök á móti D/P eru m.a. að það gefur aðeins vísbendingu um heildarafkomu.
Getum reiknað trailing dividend yield (þ.e. arðgreiðslur á liðnu ári) eða leading dividend yield (þ.e.
væntar arðgreiðslur á næsta ári).
Eins og áður getum við skrifað P/D á eftirfarandi hátt út frá GGM:
Price & Enterprise Value verðmatskennitölur
-Hægt að bera saman við önnur félög
Hægt að bera saman við justified kennitölur út frá fundamentals
P/E rök með og á móti
-Rök með: EPS Drifkraftur virðis; mikið notað og tengist ávöxtun hlutabréfa
Rök á móti: Núll, neikvætt eða mjög lítið EPS virkar ekki; einkvæmir liðir í afkomu; hægt að bjaga afkomu
Trailing og forward P/E
Vandamál við útreikning EPS
-EPS útþynning
-Undirliggjandi afkoma
-Normalized afkoma
-Mismunur á reikningsskilaaðferðum
Samanburður
-Sambærileg félög innan geirans
-Allur geirinn eða vísitölur
-Markaðurinn í víðara samhengi
-Eigin söguleg gildi
P/B rök með og á móti
-Rök með: Book value er yfirleitt > 0, stöðugra en EPS, á vel við fjármálafyrirtæki og fyrirtæki sem á að
slíta, útskýrir ávöxtun hlutabréfa
Rök á móti: Reiknar ekki með óáþreifanlegum eignum, getur gefið ranga niðurstöðu af virði eigna
breytist eða er reiknað öðruvísi m.v. reikningsskilastaðla , virkar síður þegar aldur fastafjármuna er
mismunandi (vegna uppsafnaðra afskrifta), hægt að bjaga með endurkaupum
Vandamál við að reikna bókfært virði eigin fjár
-Óáþreifanlegar eignir
-Birgðabókhald
-Off-balance-sheet atriði
-Fair value
P/S rök með og á móti
-Rök með: Erfiðara að bjaga tekjur, tekjur eru alltaf jákvæðar, P/S er stöðugra en P/E, á vel við mörg
félög (t.d. þjónustufyrirtæki), útskýrir ávöxtun hlutabréfa
Rök á móti: Tekjur jafngilda ekki afkomu eða sjóðstreymi, nefnari og teljari eru ekki consistent,
endurspeglar ekki mismunandi kostnað félaga, hægt að bjaga
P/CF rök með og á móti
-Rök með: Erfiðara að bjaga sjóðstreymi, stöðugra en P/E, tekur á quality of earnings vandamálinu,
útskýrir ávöxtun hlutabréfa
Rök á móti: Hægt að bjaga, FCFE er meira volatile og oftar neikvætt
Útreikningur á sjóðstreymi
-CF: Afkoma + noncash charges
-CFO: Fengið úr sjóðstreymi í uppgjöri
-FCFE: Réttast en breytilegast
-EBITDA: Best að nota með enterprise value
Dividend Yield rök með og á móti
-Rök með: Hluti afkomu, arðgreiðslur eru ekki eins áhættumiklar og framtíðar capital gains
Rök á móti: Einungis einn hluti afkomu, arðgreiðslur gætu aftengst afkomu í framtíðinni, markaðurinn
gæti verið ekki hrifinn af arðgreiðslum
Enterprise Value Multiples
-EV = Markaðsvirði hlutabréfa + Skuldir - Cash - Fjárfestingar
-Rök með: Heppilegt að nota þegar félög með mismunandi capital strúktúr eru borin saman, yfirleitt
jákvætt gildi
-Rök á móti: ýkir sjóðstreymi, FCFF er byggt á tryggari grunni
Justified kennitölur
P/E: + tengt g, - tengt r
P/B: + tengt ROE, - tengt r
P/S: + tengt g & PM, - tengt r
P/CF: + tengt g, - tengt r
D/P: - tengt g, + tengt r
EV/EBITDA: + tengt g & PM, - tengt WACC
Óskráð félög
Í þessum kúrs höfum við einblínt á verðmat public fyrirtækja (þ.e. fyrirtækja sem eru skráð í kauphöll) en
í þessum kafla munum við fara yfir helstu þætti í verðmati á private fyrirtækjum (þ.e. fyrirtækjum sem
eru ekki skráð í kauphöll).
Private fyrirtæki geta verið allt frá eins manns fyrirtækjum og samtökum til stórra fyrirtækja sem voru
jafnvel eitt sinn public.
Á næstu glærum förum við yfir álitamál sem eru öðruvísi í verðmati á private fyrirtækjum.
Munur á Private og public fyrirtækjum – Private fyrirtæki
- Minna þroskuð
- Minni stærð táknar meiri áhættu sem táknar hærra áhættuálag.
- Stjórnendur eru oft stórir eigendur
- Mögulega minni gæði stjórnunar
- Minna upplýsingaflæði táknar hærri áhættu og lægra verðmat
- Hluthafar hafa langtíma sjónarmið
- Meiri áhersla á skattalega stjórnun
Munur á Private og public fyrirtækjum – Public fyrirtæki
- Síðar í líftíma félagsins
- Stærri og hafa aðgang að fjármögnun á markaði
- Að miklu leiti utanaðkomandi hluthafar
- Meiri gæði stjórnunar
- Meiri pressa á að skila nákvæmum upplýsingum tímanlega
- Meiri áhersla á skammtíma frammistöðu
- Minni áhersla á skattalega stjórnun.
Verðmat á private félögum
-Verðmatsaðferðir á private félögum eru að miklu leyti svipaðar þeim sem við notum í public félögum.
Þrjár nálganir eru algengastar:
- Afkomunálgunin: Núvirt vænt framtíðarafkoma.
- Markaðsnálgunin: Samanburður verðmatskennitalna við sambærileg public félög.
- Eignanálgunin: Virði félags fundið með því að meta eignir þess og draga frá skuldir.
Það getur verið að það þurfi að lagfæra töluvert í fjárhagstölum private fyrirtækja.
Óskráð félög
-Við verðmat á private félögum er algengt að reikna með ákveðnum afslætti (discount) eða álagi
(premium) á virði þeirra.
Lack of control discount er sá afsláttur sem fjárfestir vill fá af verði hlutabréfa félagsins ef hann nær ekki
áhrifastöðu á meðal hluthafa þess.
Lack of marketability discount er sá afsláttur sem fjárfestir vill fá af verði hlutabréfa félagsins vegna
illseljanleika þeirra.
Munur á skráðum (public) og óskráðum (private) félögum ---Company specific
Stock specific
Ástæður fyrir verðmati á óskráðum félögum
-Fair market value
-Market value
-Fair value fyrir fjárhagsupplýsingar eða lagalegan ágreining
-Investment value
-Intrinsic value
Verðmatsaðferðir
Income aðferðin: Free cash flow, capitalized cash flow, og residual income líkön
Market aðferðin: Guideline public company, guideline transactions, og fyrri viðskipti með hluti félagsins
Asset-based aðferðin
Afslættir ---Skortur á stjórn
Skortur á seljanleika
Verðmatsstaðlar ---Fjalla um verðmatsferlið
Ætlað til verndar notenda og almennings
_____________________________________________________________________________________
1) Paying attention to which of the following tends to lead to a company doing well in the stock
market?
I) Growth
II) Price-to-earnings ratio (P/E RATIO)
III) Earnings per share
IV) Return on Invested Capital ---Answer: I and IV Only The two sources of value creation are growth
and return on invested capital.
2) M. Magoo's, a constant lens provider, is expected to generate Free Cash Flows (FCFS) of $100m,
$110m, $120mm in years 1-3. Beyond Year 3, they are expected to experience a growth rate of 4% in
FCF's indefinitely. If they have a WACC of 12%, what is the present value of their operations (don't
forget mid-year adjustment factor)?
a) $278mm
b) $1,373mm
c) $1,453mm
d) $1,838mm
e) $1,890mm ---Answer: C - $1,453
Math:
= (1 + WACC) ^ .05 *[ PV (FCFS 1-3) + PV (TV) ]
=(1.12) ^.05 *[ (100/(1.12) + (110/(1.12)^2 + 120/(1.12)^3 ] + [ (1 / (1.1)^3 * (120*1.04)/(.12-.04)
= 1.058 * 1,372.77 = $1,453
3) Use the following information to answer the question.
NOPLAT(T+1) = $99.0mm
NOPLAT growth rate = 5.0%
Return on new invested capital = 11%
WACC = 9.0%
Which of the following is closest to the continuing value in year t?
a) $999million
b) $1,005million
c) $1,350million
d) $1,418million
e) $2,970million ---Answer: C $1,350million
Continuing Value = ( ( Noplat (t+1) (1 - (g/RONIC)) / WACC - G = 99 * (1 - (.05/.11) / (.09-.05) = $1,350.00
4) Which of the following is NOT true concerning application of the conservation of value principle to
acquisitions?
a) An acquisition will create value if it increases cash flows sufficiently by reducing costs
b) An acquisition will create value if it increases cash flows sufficiently by increasing revenue growth
c) An acquisition will create value if it increases cash flows sufficiently by improving the use of fixed or
working capital
d) An acquisition will create value if it grows revenues. ---Answer: D An acquisition will create value if it
grows revenues.
Explanation: Growing revenues alone does not guarantee value creation. The revenue growth must
translate into adequate cash flow increases.
5) Given the following information, compute the estimated value per share:
Present value of Operating CFs (assuming first CF received 1 year from now) = $33mm
Value of Excess Cash & Investments = $2.9mm
Value of Debt = $14.4mm
Value of Capitalized Operating Leases = $5.2mm
Number of Shares outstanding = 2.5mm
WACC = 7.4%
A) $9.08
B) $7.00
C) $6.52
D) $5.84
Answer: B & C
6) Company A has a reinvestment rate of 15% and a return on reinvested profits of 20% for the
indefinite future; Company B has a reinvestment rate of profits of 20% and a return on reinvested
profits of 15% for the indefinite future. Which is true?
a) Company A will grow faster
b) Company B will grow faster
c) Company A & Company B will grow at the same rate.
d) There is not enough information to tell
-Answer: C Company A & Company B will grow at the same rate.
8) If the long-term growth rate of a company is 2.1% and the long-term ROIC is 9%, what is the
investment rate?
a) 23.3%
b) 30.4%
c) 45.5%
d) 69.6% Answer: A 23.3%
Explanation: Investment Rate = Growth/ROIC
9) A firm is financed only with debt and equity. Debt makes up 62% of overall firm financing. The
pretax costs of debt and equity capital are 6.6% and 11.3%, respectively. The tax rate is 34%. What is
the WACC?
a) 3.23%
b) 5.53%
c) 5.68%
d) 6.99%
e) 8.34%
-Answer: D - 6.99%
WACC = (0.38 * 0.113) + (0.62 * 0.066) * (1-0.34) = 6.99%
10) ExpenseCo, a warehouse club is expected to operate for only two more years. After this, there will
be no residual value to the firm. Given the following information, what is the firm value at the end of
2014 using the Adjusted Present Value (APV) approach? (Assume that the interest tax shields are as
risky as the firm and that there are no non-operating assets.) Ignore the mid-year adjustment factor
for this problem.
Forecast Year
FCF
Interest Payment
2015
$100.00
$10
2016
$150.00
$10
Marginal Tax Rate = 35% Unlevered cost of equity = 10%
a) $20mm
b) $215mm
c) $221mm
d) $229mm
e) $270mm
12) Which of the following valuation methods assume that the weighted average cost of capital
(WACC) is constant?
I) Economic Profit Model
II) The adjusted present value model
III) The discounted cash flow model
IV) All of the above assume the WACC is constant
a) I and II only
b) I and III only
c) II and III only
d) I, II, III, and IV
13) Suppose that your favorite firm, Diamond Bills, is expected to have Operating Profit of $200m this
coming year. They have an operating tax rate of 25%, a WACC of 14%, and currently have invested
capital of $1,000m. What is their projected Economic Profit for the coming year?
a) $10m
b) $15m
c) $20m
d) $25m
e) $30m
Explanation: Economic Profit = NOPLAT - Capital Change = (200 * (1-.25) - (.14 * 1,000) = 150 - 140 =
$10m
14) Increasing the growth rate of earnings will always add value to a firm.
a) True
b) False
15) If done correctly, one should obtain the same value for a firm using DCF or Economic Profit
Methodologies:
a) True
b) False
16) In general, a firm that has a ROIC substantially above its WACC and low revenue growth should
focus on increasing which variable to add the most value?
a) Growth
b) Taxes
c) ROIC
d) WACC
Explanation: A firm with an ROIC substantially above its WACC benefits much more from increasing
growth than from improving ROIC, as the additional growth yields a relatively high spread between ROIC
and WACC
17) The faster companies can increase their revenues and deploy more capital at attractive rates
return, the more value they create.
a. true
b. false
2) Which of the following will increase the value of a firm from previous question ?
Options:
a) Increasing the long-term growth rate, keeping all other variables constant
b) Increasing the WACC, keeping the other variables constant
c) Increasing the ROIC, keeping all other variables constant
d) (A) and (B)
e) (A) and (C)
f) (B) & (C)
3) A 10% increase in value is most likely the result from a 10% increase in which of the following:
a. Growth
b. ROIC
c. NOPLAT
d. WACC
4) The firm should engage in share repurchases only if it does not have available investment
sufficiently high ROIC
a. true
b. false
5) When ROIC = Cost of Capital, there is no relationship between growth and value:
a. true
b. false
6) In general, a firm that has a ROIC slightly above it's WACC and high revenue growth should focus on
increasing which variable to add the most value?
Answer: ROIC
Why? A firm with an ROIC very close to its WACC benefits much more from improving its ROIC than from
growing more rapidly, as the growth still generate relatively low spreads between ROIC and WACC.
7) Which of the following is the best model for a financial institution?
Answer: Equity Cash Flow Model
8) Which of the following valuation methods assume that the WACC is constant?
Options:
1) The Economic Profit Model
2) The Adjusted Present Value Model
3) The Discounted Cash Flow Model
4) All of the above assume the WACC is constant
9) Given the following information, compute the estimated value per share:
Present value of operating CFs = 400
Midyear adjustment factor: 14.5
Value of Excess Cash & investments: $35.5
Value of Debt = $88
Value of Capitalized Operating Leases = $17.5
Number of shares outstanding (MM) = 30
-Answer = (400mm + 35.5mm - 88.0mm - 17.5mm) / 30mm = 11.48 per share
10) Use the following information to answer the question:
NOPLAT(T+1) = $72.2mm
NOPLAT growth = 3%
Return on new invested Capital = 11.2%
WACC = 7.4%
Which of the following is the closest to the continuing value in year t?
-Answer: =72.2*(1-3%. / 11.2% ) / (7.4% - 3%) = $1,201.37
11) A firm is financed with 30% debt and 70% equity. The pretax cost of debt and equity capital are 8%
and 14%, respectively. The tax rate is 40%. What is the WACC?
-Answer: 11.24%
12) Operating leases represent the most common form of off-balance sheet debt
a. true
b. false
13) Enterprice (DCF) and economic-profit models differ with respect to the rate used to estimate the
future income steams:
A. True
B. False
14) When the likelihood of investing cash at ___________ is _______, share repurchases make sense
as a tactic for avoiding value destruction:
-Answer: low returns, high
What is the conservation of value?
The conversation of value principle states that anything that does not increase CFs does not increase
value. An example is an internet company that lures viewers to a website but does nothing to generate
sales. Yes, it may get more hits and more eyeballs, but it is not increasing CCFs. Not recognizing this
principle was one of the problems during the internet bubble in the late 1990s. Another example might
be changing a firm's cap. structure, which does not change the nature of the productive assets.
Therefore, its value-creating capability should be scrutinized.
Do acquisitions create growth?
There is no value in simply becoming bigger through an acquisition. An acquisition will crate value only if
it increases CFs by reducing costs, increasing revenue growth, or improving the use of fixed or working
capital. If an acquirer cannot forecast one or more of these benefits occurring from an acquisition, then
it should not to through.
How does diversifiable and non-diversifiable risks affect a company's cost of capital? ---Answer: For
public companies, non-diversifiable risk affects the cost of capital, and diversifiable risk does not.
Diversifiable risk arises from firm-specific factors, such as fluctuations in demand for a firm's products,
the ability to retain talented management, and risking input costs. Since investors can diversify this risk
by holding a broad portfolio of stocks, only the non-diversifiable risk affects the cost of capital.
1) If you observe that firm Y has a higher Operating Profit Margin that Firm Z, what could be driving
this?
a) Firm Y has a higher gross margin than firm Z.
b) Firm Y has a lower SG&A to sales ratio than firm Z
c) This could arise from either (a) or (b) or both
d) None of the above
2) Which of the following statements is true regarding ROIC and revenue growth decomposition, as
applied to home depot?
a) In examining Home Depot's operating margin, we could decompose it further into gross margin, SG&A
to sales and depreciation to sales
b) In examining Home Depot's capital turns, we can decompose it further into gross margin, SG&A to
sales and depreciation to sales
c) In Examining Home Depot's revenue growth, we can decompose it further into revenues per store and
number of stores
d) (a) and (c)
3) Which of the following statements is true?
a) A higher debt-to-equity ratio has no impact on ROE
b) Higher interest coverage ratios are correlated with lower borrowing costs for firms
c) A higher debt-to-equity ratio ahs no impact on ROIC
d) (a) and (b)
e) (a) and (c)
f) (b) and (c)
4) Given the following information, what are the EBIT, EBITDA, and EBITDAR coverage ratios?
EBIT = $500
Depreciation = $50
Rental Expense = $40
Interest Expense = $40
a) 12.5, 13.8, 7.4
b) 12.5, 13.8, 14.8
c) 12.5, 11.3, 7.4
d) 12.5, 11.3, 14.8
EBIT coverage = 500/40 = 12.5
EBITDA Coverage = (500 + 50) / 40 = 13.8
EBITDAR Coverage = (500 + 50 + 40) / (40 + 40) = 7.4
5) Which of the following statements is true regarding analyzing historical revenue growth?
a) The three effects that we should try to strip out of reported Revenue are currency changes, merger
and acquisition activity, and organic growth
b) The three effects that we should try to strip out of reported Revenue are changing in accounting
policies, merger and acquisition activity, and organic growth
c) We can always get information on all of a firm's mergers from their 10-K
d) Analyzing a firm's organic Revenue growth historically is the best way to inform future projections
of revenue growth
6) Given the following information, what is the NOPLAT for this firm in year 1?
Revenues: $1,000
COGs: ($600)
SG&A (200)
Depreciation: (40)
Operating Profits: $160
Interest = ($12)
EBT = $148
Net Income = $111
a) $104.0
b) $111.0
c) $120.0
d) $160.0
e) $200
NOPLAT = Operating Profits (1-t)
8) Which of the following should be subtracted off of firm value to arrive at equity value?
a)Unfunded retirement liabilities
b) Long-Term Debt
c) Non-Operating Assets
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) All of the above
10)Given the following information, what is the Free Cash Flow for this firm?
Sales = $1,100
Depreciation = $42.0
NOPLAT = $133.5
Net Income = $124.5
Capital Expenditures = $66
Investment in Operating Working Capital = $5.0
a) 64.5
b) 104.5
c) 133.5
d) 175.5
e) 194.5
FCF = NOPLAT + Depreciation - Investment in OWC - CapEx = $133.5 + $42 - $5 - $66 = $104.5
Which of the following statements is true?
a) Operating Asset - Operating Liabilities = Total Funds Invested
b) Debt + Equity = Invested Capital
c) Excess Cash likely achieves the same return as a firm's core operating assets
d) We find Invested Capital by rearranging the Income Statement.
e) Total Funds Invested can be calculated both from an operating and financing perspective
12) Which of the following are operating liabilities?
I. Notes Payable
II. Accrued Salaries
III. Deferred Revenue
IV. Dividends Payable
a) I and II only
b) II and III only
c) I, III, and IV only
d) I, II, III, and IV
13) If a firm's ROE improves from one period to the next, this could be due to:
a) Improved Operating Margin
b) Improved Capital Turnover
c)More debt usage
d) (a) and (b)
e) (a) and (c)
f) (b) and (c)
g) All of the above
14) Which of the following are included in operating current assets?
I. Working Cash
II. Excess Cash
III. Inventory
Iv.Accounts Receivable
a) I, II, and III only
b) I, II, and IV only
c) I, III, and IV only
d) I, II, III, and IV
Explanation: Only the working cash portion of total cash is included in operating current assets
15) Which of the following statements are true?
a. Goodwill arises from the charity work that a firm does
b.Including Goodwill in Invested Capital will yield a lower ROIC vs. not including it in Invested Capital.
c. Analyzing ROIC excluding Goodwill is always the best way to analyze a firm's perspective.
d. Including Goodwill in Invested Capital will yield a higher ROIC vs. not including it in Invested Capital.
1) Which of the following are included in operating current assets?
1. Inventory
2. Prepaid Expenses
3. Marketable Securities
4. Trade accounts receivable
2) Which of the following are operating liabilities?
1. Accounts payable
2. Accrued Salaries
3. Deferred Revenue
4. Income Taxes Payable ---Answer: All of the above
3) Nonconsolidated subsidiaries and equity investments should be measured and valued separately
from invested capital:
A. True
B. False
4) Pension Assets are considered an operating asset and part of invested capital:
A. True
B. False -Pension assets are considered a nonoperating asset and not part of invested capital. Their
value is important to the equity holder, they will be valued later, but separately from core operations
5) In computing FCF, include investments in capitalized operating leases in gross investment.
A. True
B. False
7) In rearranging the firm's balance sheet to better assess firm performance, which of the following
categories are helpful?
a. Operating
b. Non-Operating
c. Sources of financing
d. (a) and (b)
e. (b) and (C)
f. (a) and (C)
g. All of the Above
h. None of the above
8) How will an increase in invested capital affect FCF and ROIC if all other things are kept equal?
a) It will decrease both FCF and ROIC
b) It will increase both FCF and ROIC
c) It will increase FCF but decrease ROIC
d) It will decrease FCF but increase ROIC
9) Which of the following are sources of financing?
a) Equity Equivalents
b) Debt Equivalents
c) Hybrid Securities
d) Minority Interests ---Answer: All of the above
10) A balance sheet has the following entries: Working cash = $200, Receivables = $100, Accounts
Payable = $50, Notes Payable = $30. What is the value of operating assets?
a. $220
b. $250
c. $270
d. $300 ($200+$100)
e. $320
f. $250
11) balance sheet has the following entries: Working cash = $200, Receivables = $100, Accounts
Payable = $50, Notes Payable = $30. What is the value of operating working capital?
a. $220
b. $250 ($300-$50)
c. $270
d. $300
e. $320
f. $250
**Note, Notes payable is long-term and therefore not apart of operating working capital.
12) Given the following balance sheet entries, compute the debt and total funds invested:
Operating Assets = $400
Marketable Securities = $100
Prepaid Pension Assets = $50
Accounts Payable = $60
Deferred Tax Liability = $30
Shareholders' Equity = $200
Answer: $260
Total Funds Invested = OA - OL + NOA = $400 - $60 + $100 + $50 = $260
Total Funds invested = Operating Assets - A/P +
Marketable Securities + Prepaid Pension Asset
Debt = $200 + 60 = $260
Debt = Shareholders' Equity + A/P
13) ROIC is a better analytical tool than return on equity and return on assets because:
a) ROE mixes operating performance with capital structure
b) ROA includes non-operating assets, and it ignores the benefits of accounts payable and other
operating liabilities
c) (A) and (B)
d) None of the above
14) Which of the following is most accurate?
a) Analyzing ROIC excluding goodwill is the best measure for determing value added for shareholders
b) Analyzing ROIC excluding goodwill serves no purpose
c) Analyzing ROIC excluding goodwill is the preferred method for most analysis:
d) None of the above statements are true
15) Compute ROIC given the following information: EBITDA = $3,000, Revenues = $5,000, Invested
Capital = $20,000 Operating Tax Rate = 25%
a. 3.75%
b. 5.33%
c. 11.25%
d. 18.75%
(1-0.25) * (3,000 / 5,000) * (5,000 / 20,000) = 11.25%
16) Which of the following is the best method of determining if the financial performance between
competitors is sustainable?
a) Linking Operating Drivers directly to return on Capital
b) Comparing the respective ROE & ROA measures
c) Breaking ROE down into ROIC, Tax, interest rate, and leverage effects
d) Distinguish between pre-tax ROIC and operating-cash tax rate
17) Pretax ROIC can be broken down into:
a. Operating margin and operating-cash tax rate
b. Operating margin and revenues / invested capital
c. Operating Working capital / (revenues + fixed assets/ revenues)
d. Gross margin and selling, general and administrative (SG&A) expense divided by reven
18) Other things being constant, if EBIT and revenues both increase by 10%, then it is likely that:
a) ROIC will decrease
b) ROIC will remain the same
c) ROIC will increase
d) ROIC will change, but the direction is not certain
1) Which of the following is most accurate concerning the median revenue growth rates of firms over
the years 1965 to 2013?
a) The range was 1.5% to 12%, with a median of 7.2%
b) The range was 0% to 9%, with a median of 5.3%
c) The range was 2.2% to 8.8%, with a median of 4.2%
d) The range was -0.2% to 6.6%, with a median of 3.3
2) Companies that grow slower than 0% in one year generally within five years see their growth
increase to:
a) About 4% and then up to 4.5% within 10 years
b) About 1% and then up to 2% within 10 years
c) About 6% and then up to 8% within 10 years
d) About 8% and then up to 10% within 10 years
3) Companies that grow faster than 30% in one year generally within five years see their growth
decline to:
a) About 4% and then down to 2% within 10 years
b) About 12% and then down to 10% within 10 years
c) About 10% and then down to 8% within 10 years
d) About 8% and then down to 6% within 10 years
4) Which of the following explain the reason that growth-rate rankings change over industries so
much over time?
I. The business cycle
II. Changing regulations
III. Fluctuating exchange rates
IV. Product life cycles
a) I and II only
b) I and IV only
c) II and III only
d) III and IV only
5) Which of the following is true concerning an increase in market share that comes at the expense of
established competitors?
a) It rarely creates much value for long except when it results in pushing a competitor out of the
market completely
b) It generally creates fair value for a fairly long period, but it will decay after about 10 years
c) It never creates any value over the long run because the effects are random across firms and net to
zero for any given firm over time
d) None of these
6) Which of the following usually result in above-average value creation?
I. Make large acquisitions
II. Attract new customers into the market
III. Convince existing customers to buy more of a product
IV. Make bolt-on acquisitions to accelerate product growth
a) I and II only
b) I, III, and IV only
c) II and III only
d) III and IV only
7) Which of the following is most accurate concerning corporate growth rates?
a) High growth rates decay quickly, and large companies struggle to grow
b) High grow rates are sustainable for 10 years or more, but large companies struggle to grow
c) High Growth rates decay quickly, but larger companies grow more easy than small companies
d) High growth rates are sustainable for 10 years or more, but large companies grow more easily than
small companies
8) Which of the following are types of organic revenue growth?
I. Mergers
II. Acquisitions
III. Portfolio momentum
IV. Market share performance
a) I and II only
b) I, II, and III only
c) II and IV only
d) III and IV only
9) Which of the following is LEAST likely to result in above-average, long-run value creation?
a) Creation of new markets through new products
b) Attracting new customers into the market
c) Convincing existing customers to buy more of a product
d) Gains in market share from rivals through product promotion
10) The strategy of making bolt-on acquisitions to accelerate product offerings:
a) Has not been proven to create value
b) Can create positive and average value compared to other strategies
c) Can create positive and above-average value compared to other strategies
d) Can create positive but below-average value compared to other strategies.
11) Incremental innovation will rarely create lasting value:
a) True
b) False ---Answer:
12) Average industry revenue growth varies considerably across industries, but the growth rate
among companies in the same industry are fairly uniform:
a) True
b) False
13) The only way to achieve consistently high growth is to consistently find new product markets and
enter them successfully in time to enjoy their more profitable high-growth phase:
a) True
b) False
(This is the concept of having sustainable growth from new products, i.e., there's never a time where
you don't have a high growth product in the market)
14) While the pace of growth can vary across products and services, the pattern of growth is usually
the same for almost all products and services:
a) True
b) False
This is reliant on the "The pattern" portion of the statement above
1) What is the key-driver of long-term sustainable ROIC over WACC?
a) Revenue Growth
b) Competitive Advantage
c) Capital Intensity
d) Profitability
2) Which of the following is not one of Michael Porter's five forces?
a) Threat of entry
b) Regulatory restrictions
c) Bargaining power of buyers
d) Bargaining power of suppliers
3) Which of the following industries is most likely to have the lowest ROIC w/o Goodwill?
a) Software
b) Information Technology Services
c) Pharmaceuticals
d) Paper Packaging
4) A firm's additional costs of producing each additional unit of its product are essentially zero. The
best term for describing the firm's product is that it:
a) Is a scalable product
b) Demonstrates economies of scale
c) Exhibits increasing returns to scale
d) Both (b) and (c)
e) None of the above
5) Given that a company charges $10.00 per unit, has a cost per unit of $9.10 and a tax rate of 28%,
and requires $4.50 of invested capital per unit, what is the ROIC?
a) 3.82%
b) 5.18%
c) 9.44%
d) 14.40%
Math:
NOPLAT: $.90*(1-.28) = $.65
Invested Cap per unit: $4.50
ROIC = .65/4.50 = 14.40%
6) Which of the following are sources of competitive advantage that allow a firm to charge a price
premium?
i. Quality
ii. Customer lock-in
iii. Innovative products
iv. Rational price discipline
a) I and II only
b) I, III, and IV only
c) II and III only
d) I, II, III, and IV
7) Which of the following price premiums is difficult to sustain?
a) Quality
b) Customer lock-in
c) Innovative products
d) Rational price discipline
Explanation: Price discipline (or coordinated elevation of price by industry firms) is difficult to sustain b/c
individual firms have an incentive to deviate from the agreed upon price to take market share
8) If a firm establishes itself as a high-ROIC firm, within 10 years it is expected that ROIC will:
a) Have fallen to the average or be below average ROIC
b) Have fallen, but will still be above the average ROIC
c) Not have fallen, and will maintain about the same
d) Have continued to trend up
Explanation: ROIC tend to be mean reverting, but firms tend to sustain their relative position to the
mean (i.e., higher or lower) for more than 10 years
9) Given that a company charges $3.40 per unit, has a cost per unit of $1.80, has a tax rate of 32% and
requires $16 of invested capital per unit, what is the ROIC?
a) 6.8%
b) 10.2%
c) 15.6%
d) 30.3%
Math:
NOPLAT = $3.40-$1.80 = $1.60 * (1-.32) = $1.09
Invested Capital = $16
ROIC = $1.09/$16 = 6.8%
10) Cereal manufacturers can brand their products, but meat producers have had a more difficult time
at doing so. Based on this fact, which of the following is the most accurate concerning the pricing
advantage that cereal manufacturers have over meat producers?
a) The ROIC for cereal manufactures is less than that of meat producers because branding does not
create value and branding has a cost
b) The ROIC for cereal manufacturers is equal to that of meat producers because the costs and benefits
reach an equilibrium
c) The ROIC for cereal manufacturers is twice as high as that of meat producers
d) The ROIC for cereal manufactures is three times as high as that of meat producers
Explanation: For Cereal manufacturers and meat producers, the ROICs are 30% and 15%, respectively.
Cereal manufacturers earn a higher return as a result of being able to brand their products.
11) ROICs tend to be mean reverting, but firms tend to sustain their relative position to the mean (i.e.,
either higher or lower) for 10 years or more.
a) True
b) False
12) Historically, the growth rate of firms tend to be more stable than their ROICs:
a) True
b) False
Explanation: Growth rates are less stable than ROICs
13) Compared to industries where firms produce generic products, firms in industries where they can
brand their products generally earn higher ROICs.
a) True
b) False
Explanation: Innovation leads to higher growth opportunities; therefore, more opportunities = higher
ROIC
14) Cost efficiencies offer any business the greatest scope for achieving an attractive ROIC, but they are
usually more difficult to achieve than price premiums:
a) True
b) False
Explanation: Price premiums offer any business the greatest scope for achieving an attractive ROIC, but
they are usually more difficult to achieve than cost efficiencies
15) Certain industries are biased toward earning either high, medium, or low returns, but there is still
significant variation in the rates of return for individual companies within each industry:
a) True
b) False
1) Increasing Competition is likely to lower the return on new invested capital below the return on
total invested capital.
a) True
b) False
Explanation: The firsts projects will be those that earn the highest returns. Subsequent projects will have
lower returns. The average of the first and later projects' return will be higher than the return of the
later projects.
2) Which of the following is the best recommendation for forecasting performance?
A) Use an explicit forecast period of two to five years, and longer for cyclical companies or those
experiencing very rapid growth
B) Use an explicit forecast period of two to five years, and shorter for cyclical companies or those
experiencing very rapid growth
C) Use an explicit Forecast period of 10 to 15 years, and longer for cyclical companies or those
experiencing very rapid growth
D) Use an explicit forecast period of 10 to 15 years, and shorter for cyclical companies or those
experiencing very rapid growth
4) Given the following information, what is the Economic Profit Continuing Value? (Please note that
rounding may yield answers that are slightly off)
RONIC = 8%
ROIC on base level capital = 12%
NOPLAT(T+1) = $240
Invested Capital(t) = $2,000
WACC = 9%
Growth in NOPLAT = 2.0%
a) $571.43
b) $666.67
c) $2,000
d) $2,571.43
e) $2,666.67
5) In forecasting the income statement, it is recommended to tie all items directly to revenue.
a) True
b) False - - While most you want to tie to Rev., you don't want to automatically assume
6) The explicit forecast period must be long enough for the company to reach a steady state. Which of
the following is NOT a desirable property of that steady state?
a) The growth rate rises above the required return on capital
b) The company earns a constant rate of return on existing capital
c) The company earns a constant rate of return on new invested capital invested.
d) The company reinvests a constant proportion of its operating profits into the business each year
7) Which of the following are common pitfalls or mistakes in estimating a continuing value?
I) Naïve base-year extrapolation
II)Naïve Overconservatism
III) Purposeful overconservatism
IV) Too high of a continuing value estimate
A) I and II only
B) I, II, and III only
C) II, III, and IV only
D) III and IV only
8) In estimating contunuing value, how does assuming RONIC = WACC as opposed to RONIC does not =
WACC Affect the importance of assumptions concerning growth?
a) Assumptions concerning growth do not change in importance
b) Assumptions concerning growth become unimportant when RONIC = WACC
c) Assumptions concerning growth become more important when RONIC = WACC
d) Assumptions concerning growth become less important when RONIC = WACC but are still important
9) If a company forecasts that its capital expenditures will be smooth, then in forecasting depreciation
it is better to use the percentage of revenues approach than the percentage of PP&E approach.
a) True
b) False - If capital expenditures are smooth, the choice between the % of revenues approach and PP&E
doesn't matter. But if capital expenditures are lumpy, you will get better forecasts if you can use PP&E
as the forecast driver.
10) A bottom-up approach for forecasting revenues relies on projections of customer demand.
a) True
b) False
11) When using PP&E as the forecast driver for depreciation, which of the following is most accurate?
a) From both an ideal and a practical standpoint, the driver should be net PP&E
b) From both an ideal and a practical standpoint, the driver should be gross PP&E
c) Ideally, the driver should be net PP&E, but from a practical standpoint the driver should be gross
PP&E
d) Ideally, the driver should be gross PP&E, but from a practical standpoint the driver should be net
PP&E
14) Which of the following are true concerning forecasting interest income?
I) It is a non-opearting measure
II) Its typically forecast driver is revenue
III) It is an operating measure
IV) The typical forecast ratio is interest income in the current period / excess cash in the previous period
A) I and II only
B) I and IV only
C) II and III only
D) III and IV only
15) Given the following, what is the continuing value in Year T?
NOPLAT (T+1) = $500
G = 4%
RONIC = 11%
WACC = 9%
A) $10,000
B) $6,364
C) $5,456
D) $2,600
E) $808
CV(T) = NOPLAT (t+1) (1 - (G/RONIC) / (wacc - g)
= $500 (1- (.04/.11) / (.09-.04) = $6,364
1) Which of the following are steps in making a top-down forecast?
I. Forecasting Prices
II. Size the total market
III. Determine market share
IV. Estimating customer turnover
a) I and II only
b) I, II and III only
c) II, III, and IV only
d) III and IV only
2) In industries where prices are changing or technology is advancing, forecasters should use only
financial drivers such as revenue.
a) True
b) False
Explanation: In industries where prices are changing or technology is advancing, forecasters should
incorporate nonfinancial ratios, such as volume and productivity.
3) When using plant, property, and equipment (PP&E) as the forecast driver, tie depreciation to net
PP&E rather than using a gross PP&E approach.
a) True
b) False
4) It is recommend in the financial modeling process to collect raw data on a separate worksheet and
record the data as originally reported.
a) True
b) False
5) The top-down approach cannot be applied to companies in mature industries.
a) True
b) False
6) To forecast the balance sheet, it is best to first forecast invested capital and nonoperating assets
and then forecast excess cash and sources of financing separately:
a) True
b) False
1) Increasing competition is likely to lower the return on new invested capital below the return on
total invested capital.
a) True
b) False
2) In the continuing value formula for a company, NOPLAT should reflect an average level associated
with the midpoint of the business cycle.
a) True
b) False
3) In making forecasts to estimate the value of a company, at the point where competition has
eliminated abnormal returns it is appropriate to set RONIC = WACC.
a) True
b) False
4) The expected long-term rate of consumption growth for the industry's products plus inflation is a
good estimate for growth in the continuing value models.
a) True
b) False
5) The estimate of continuing value after the explicit forecast period cannot be higher than the total
value of the firm
A. True
B. False
6) Managers are overly optimistic about continuing value
A. True
B. False
7) In a growing, profitable industry, a company's liquidation value is probably well below the going
concern value.
A. True
B. False
8) The percentage of the firm's value determined by continuing value would be most likely increase as
the forecast horizons increases.
A. true
B. False
9) As a firm begins to grow and faces increasing competition as it expands, which of the following
most likely to be the relationship among ROIC on base capital, RONIC, and ROIC on total capital?
Answer: ROIC on base capital > ROIC on total capital > RONIC
10) An analyst makes a five-year explicit forecast of revenues of a firm. During those five years, the
firm is expected to grow between 10-12% per year. After that, the growth rate is expected to level off
at 8%. Should the analyst use a naïve base year extrapolation for the continuing value? Why or why
not?
---Answer: No, because it will likely underestimate FCF
11) The alternative continuing value measure CVt = (NOPLAT t + 1) / WACC depends on the
assumption that:
---Answer: excess profits will be competed away
1) Which of the following approaches are methods for evaluating convertible debt?
I. Market Value
II. Multiples Value
III. Black-Scholes Value
IV. Conversion value
a) I and II only
b) I and III only
c) I, III, and IV only
d) II, III, and IV only
2) Researchers have concluded that an appropriate range of the equity risk premium for use in
valuation models should be between 10% and 12%.
a) True
b) False
Explanation: Different forms of measurement converge on appropriate range of market risk premium of
4.5 to 5.5%, which has held even during the financial crisis of 2008.
3) An analyst gathers the following information for Firm A and Firm B. Use the information to
compute the industry unlevered beta and the appropriate beta for Firm B to use in the WACC.
(Assume a debt beta of zero for each firm and that the beta of the tax shields will equal the beta of
the unlevered firm. In other words, Bd = 0 & Beta(tax shield) = BU)
Firm A: CAPM Beta = 1.6, Debt-to-Equity Ratio = 1.2
Firm B: CAPM Beta = 1.0, Debt-to-equity ratio = 0.8
The appropriate beta for Firm B is closest to:
a) 1.026
b) 1.156
c) 1.163
d) 1.170
With the assumption of Bd = 0 and B(Tax shield) = BU; the unlevering formula simplifies to:
BL = BU (1 + (D/E)
Thus,
Firm A: (1.6 / 2.2) = 0.727
Firm B: (1.0 / 1.8) = 0.556
Avg = .642
Equity Beta = 0.642 * 1.8. = 1.156
4) A firm with a target debt-to-equity ratio of 3. Its cost of equity = 12%, its cost of debt is 9%, and the
tax rate is 34%. What is the WACC?
a) 7.46 % (0,09)(0,66) + 0,25(0,12) = 7,46%
b) 8.97%
c) 10.00%
d) 10.49%
Note that D/E = 3.0 implies a D/V Ratio = 0.75 & an E/V ratio = .25, as DV = 3.0/(3.0 + 1.0) = 0.74
5) Non-Operating assets like excess cash and equity investments are not included in the equity value.
a) True
b) False - These values are not included in the Operating Value of the firm, but they still have value to
shareholders of the firm.
6) In evaluating employee stock options, the exercise value approach provides a lower bound of stock
option valuation, and using it can overvalue the equity of the firm:
a) True
b) False
7) A corporation has 8 million shares outstanding. Using the following information (all value in
millions), calculate the value per share.
DCF of Operations = $880
Minority (or non-controlling Interest = $18
Financial Subsidiary = $40
Employee Stock Options $12
Bonds $350
Excess Cash $150 ---Value of the firm = DCF Of operations + Financial Subsidiary + Excess Cash - Bonds Employee stock options - minority (or non-controlling) Interest
= $880M + $40M + $150M - $350M - $12m - $18m = $690M
Value per share = $690M / 8m = $86.25
8) For equity stakes in subsidiaries where the stake is between 20 and 50 percent fo the subsidiary,
the holding is recorded on the balance sheet at market value, and the subsidiary's profits are shown
below operating profit on the parent company's income statement
a) True
b) False
Explanation: The equity holding in the subsidiary is reported in the parent balance sheet at the
investment's historical cost plus any reinvested income. The parent company's portion of the
subsidiary's profits is shown below operating profit on the parent company's income statement.
9) For which of these items if book value a reasonable approximation for evaluation the asset or
liability?
I. An outstanding convertible bond
II. Floating-Rate Debt
III. Discontinued Operations
IV. Employee stock Options
a) I and II
b) I, II, and III
c) I, III, and IV
d) II and III
e) II, III, and IV
10) What alternatives are available to discounted cash flow (DCF) analysis when estimating the value
of a subsidiary of a parent company using only the parent company's financial information?
a) Simplified cash-flow-to-equity valuation
b) Multiples Valuation
c) Tracking Portfolio
d) All of the Above
e) None of the aboe
1. Simplified cash-flow-to-equity: When the parent has a 20 to 50% equity stake, this is feasible because
the subsidiary's net income and book equity are disclosed in the parent's accounts. This approach means
discounting the subsidiary's cash flows at the cost of equity for the subsidiary in question and not at the
parent company's cost of capital.
2. Multiples Valuation: If the company owns 20 to 50 percent of the subsidiary, it may be appropriate to
apply multiples to the subsidiary's reported income (e.g., estimate the partial stake using a price-toearnings and/or market-to-book multiple)
3. Tracking Portfolio: For parent equity stakes below 20%, there may not be any information available
except the investment's original cost (i.e., Book value). Thus, the analyst would estimate the subsidiary's
value based on the change in value of a portfolio of comparable stocks over the same holding period.
11) Which of the following most accurately describes the types of companies for which the yield to
maturity on outstanding bonds is an approximate proxy for the cost of debt?
a) All companies with outstanding bonds
b) Only companies whose bonds are rated investment-grade
c) All companies whose bonds are rated investment-grade or below investment-grade but not in default
d) The yield to maturity is not an appropriate proxy for the cost of debt for any company because of the
reinvestment rate assumption.
12) Which of the following is NOT true concerning the index recommended for use in the capital asset
price model (CAPM)?
a) The index should include both traded and untraded investments
b) The S&P 500 is the most common proxy for U.S. Stocks
c) The MSCI World Index is a commonly used index for analysts outside of the U.S.
d) For lesser-developed countries, a local market index is recommended
13) Given the following information on Hoya Co. and the market, what is the best estimate of their
cost equity to use in valuing the firm?
MRP = 5.50%
Beta using 102 observations of weekly data = 1.20
Beta using 60 observations of monthly data = 1.10
Yield on 3-month US Treasury Bill =0.75%
Yield on 10-year US Treasury Coupon Bond =2.50%
Yield on 10-year US Treasury Strip =2.75%
A) 6.80%
B) 8.55%
C) 8.80%
D) 9.10%
E) 9.35%
COE = Rf + (B * MR) = 2.75% + (1.10 * 5.50%) = 8.80%
14) A firm has 4 million shares of stock outstanding with a price per share equal to $22. The firm's only
debt consists of 200,000 bonds outstanding priced at $995 each. The cost of equity is 14%, the cost of
debt is 8%, and the corporate tax rate is 34%. If the firm expects to maintain the current capital
structure going forward, what is the WACC?
a) 11%
b) 9.84%
c) 8.25%
d) 7.96%
e) 6.49%
WACC = 0.693 (.08)(.66) + 0.307 (.14) = 7.96%
E = $4,000,000 * 22 = $88,000,000
D = $200,000 * $995 = $199,000,000
D/V = $199M/$287M = 0.693
E/V = $88M/$287M = .307
15) Which of the following is NOT a property necessary for a consistent estimate of the WACC?
a) It uses Book-value-based weights
b) It includes the opportunity cost of all investors
c) It includes related costs or benefits such as the interest tax shield.
d) The duration of the securities used in estimating the WACC = duration of FCF
1) To estimate the risk-free rate in developed economies, the analyst should use:
a) Short-term commercial paper
b) Short-term government government discount instruments
c) Long-term coupon paying government bonds
d) Long-term government zero-coupon bonds
2) In computing the cost of equity for a firm, which of the following are recommended steps in
estimating the CAPM beta using regression analysis?
I. Use a sample size equal to or greater than 60
II. Use daily returns
III. Use a diversified value-weighted index
IV. Watch for possible distortions from market bubbles
a) I, II, and III only
b) I, III, and IV only
c) II and IV only
d) II, III, and IV only
3) The weights to use in the WACC should reflect the:
a)Current Book Values
b) Current Market Values
c) Target market-based values
d) Book values in the case of bonds and market values in the case of equity.
4) Which of the following is not an input into the Fama-French three-factor model?
a) The difference between low book-to-market returns and high book-to- market returns
b) The difference between consumer staples returns and commodity returns.
c) The market portfolio returns
d) The difference between small-cap returns and large-cap returns
5) Which of the following are true concerning the index recommended for use in the CAPM?
I. It should include both traded and untraded investments
II. The S&P 500 is a common proxy for U.S. Stocks
III. The MSCI World Index is a commonly used index for analysts outside of the U.S.
IV. For less developed countries, a local market index is recommended.
a) I and II
b) II and IV
c) I, II, and III
d) II, III, and IV
6) Bloomberg's recommended adjustment to a firm's beta will:
a) Lower beta in all cases
b) Increase beta in all cases
c) Move the beta toward one
d) Either increase or decrease beta, but it depends on the size of the standard error of the estimated
beta.
7) An analyst gathers the following information for Firm A and Firm B, two similar sized firms in the
same industry. Using the information to compute the industry unlevered beta, what are the
appropriate betas for Firm A and for Firm B for use in their WACCs? (assume a debt beta of zero for
each firm and that the beta of the tasx shields will eual the beta of the unlevered firm. In others
words, Bd = 0, B Bu)
a)0.45; 0.45
b) 0.50; 0.40
c) 0.70; 1.20
d) 0.63; 1.35
Firm A = (0.7 / 1.4) = 0.5
Firm B = (1.2/3.0) = 0.4
Avg. unlevered beta = 0.45
Firm A: 0.45 * 1.4 = 0.63
Firm B: 0.45 * 3.0 = 1.35
8) A firm has a target debt-to-equiy ratio of one. Its costs of equity = 10%, the cost of debt is 6%, and
the tax rate is 40%. What is the WACC?
a) 13.6%
b) 8.0%
c) 6.8%
d) 5.5%
e) 3.6%
9) A firm has 1,500,000 shares of stock outstanding with a price per share = $10. The firm's only debt
consists of 8,000 bonds outstanding, price at $1,125 each. The cost of equity is 12%, the cost of debt is
9%, and the corporate tax rate is 34%. If a firm expects to maintain the current capital structure going
forward, what is the WACC?
a) 9.73%
b) 10.88%
c) 8.21%
d) 7.18%
e) 10.00%
10) Given the following information on Hoya Co. and the market, what is the best estimate of their
cost of equity to use in valuing the firm?
MRP = 5.0%
Beta using 50 observations of monthly data = 0.90
Beta using 102 observations of weekly data = 0.80
Yield on 10-year US Treasury Coupon Bond = 4.20 %
Yield on 10-year US Treasury Strip = 4.60%
Yield on 3-month US Treasury Bill = 1.50%
a) 6.00%
b) 8.20%
c) 8.60%
d) 8.70%
e) 9.10%
1) Which of the following is not a method for evaluating convertible debt?
a) Market Value
b) Multiples Valuation
c) Black-Scholes Valuation
d) Conversion Price Valuation
2) An analyst is applying an integrated-scenario approach to evaluate operations as well as equity,
and the analyst essentially treats equity as a call option on the enterprise value. It is most likely the
analysis is of a company that:
a) Is highly levered
b) Has securitized receivables
c) Uses income smoothing
d) Has excess pension assets or liabilities
3) In evaluating employee stock options, the exercise value approach provides:
a) Lower bound of stock option valuation, and using it can undervalue the equity
b) An upper bound of stock option valuation, and using it can undervalue the equity
c) A lower bound of stock option valuation, and using it can overvalue the equity
d) A upper bound of stock option valuation, and using it can overvalue the equity.
4) Company X controls Company Y so that Company Y's financial statements are fully consolidated in
the group accounts. With respect to Company X's Financial Statements, third-party stakes in Company
Y:
a) Are not of concern
b) Are to be deducted and are called minority or non-controlling interest
c) Are to be added in and are called minority or non-controlling interest
d) Are illegal
5) For equity stakes in subsidiaries where the stake is between 20 and 50 percent of the subsidiary,
the holding is recorded on the balance sheet at:
a) Market Value, and the subsidiary's profits are shown below operating profit on the parent company's
income statement
b) Historical cost + reinvested income, and the subsidiary's profits are shown in the regular operating
profit of the parent company
c) Market Value, and the subsidiary's profits are shown in the regular operating profit of the parent
company
d) Historical cost plus reinvested income, and the subsidiary's profits are shown below operating profit
on the parent company's income statement.
6) A corporation has 2 million shares outstanding. Use the following information (all value in millions),
what is the value per share?
DCF of Operations = $320
Financial Subsidiary = $25
Equity Investments = $45
Bonds = $185
Employee Stock Options = $6
Unfunded Pension Liabilities: $40
a) $34.50
b) $54.50
c) 79.59
d) $85.59
e) $160.00
f) $195.00
Explanation: Value of firm = DCF of Operations + Financial Subsidiary + Equity Investments - Bonds Employee Stock options - unfunded pension liabilities
=320 + 25 + 45 - 185 - 6 0 30 = $159mm; Value per share = 159/2 = $79.50 per share
7) Given the following list, put a "+" if it increases a firm's value per share of common stock or a "-" if
it decreases the firm's value per share of common stock:
Excess Real Estate +
Preferred Stock Minority Interest Tax Loss Carry-Forward +
Unfunded Pension Liabilities Nonconsolidated subsidiaries: +
8) Indicate in which cases book value is a reasonable approximation for evaluation the asset or liability.
Select "yes" if book value is a reasonable approximation and "no" if it is not.
A. Floating Rate Debt: Yes
B. Outstanding Bonds that are secure and actively traded: No
C. Discontinued operations: Yes
D. Stake in a publicly traded subsidiary: No
E. Excess real estate: No
F. An outstanding convertible bond: No
G. Employee stock options: No
9) For a convertible bond that is deep in-the-money, the conversion value approach is a reasonable
approximation of the value of this bond:
a) True
b) False
Explanation: When the bond is 'deep in-the-money,' nearly all of its value is coming from intrinsic value.
In other words, the time value portion is very small.
10) An analysts is evaluating a corporation's subsidiary by multiplying the value of the stake in the
subsidiary when it was acquired times 1 plus the percentage change in a portfolio of comparable
stocks over the same holding period. Based on this information, answer the following question:
What are the conditions when this is a preferred method of valuation for the stake?
Answer: The subsidiary is not publicly traded, and the stake is less than 20% of the value of the
subsidiary
11) An Analyst is evaluating a corporation's subsidiary by multiplying the value of the stake in the
subsidiary when it was acquired times 1 plus the percentage change in a portfolio of comparable
stocks over the same holding period. Based on this new information, answer the following question:
What is the name of the method?
Answer: The Tracking Portfolio Method
1) Which of the following are issues in the creation of the financial statements for business units?
I. Allocating Corporate overhead Costs
II. Dealing with intercompany transactions
III. Estimating Unit Betas
IV. Dealing with incomplete information when using public information
a. I and II only
b. II and IV only
c. I, II, and IV only
d. II, III, and IV only
2) Which of the following questions relate to the economic consistency of a model?
I. Are the patterns intended?
II. Are the patterns reasonable?
III. Are the patterns consistent with industry dynamics?
a.I and II only
b. II and III only
c. I, II, and III
d. None of the above
3) Which of the following correctly describes how to determine the beta for a business unit within a
multiple-business corporation?
a) Use the average of the equity beta for the industry
b) Use the beta of the multi-unit enterprise
c) Relever the unlevered sector median beta using the capital structure of the unit
d) Relever the unlevered sector median beta using the capital structure of the entire multiple-business
corporation
4) In a scenario analysis, which of the following are considerations when reviewing the assumptions of
a model?
I. The sensitivity of the results to broad economic conditions
II. The level of competitiveness of the industry
III. The internal capabilities of the company to achieve the forecasts of output & growth
IV. The ability of the company to raise the necessary capital from the markets
a) I and II only
b) II and III only
c) I, III, and IV only
d) I, II, III, and IV
5) When estimating a company's value, it is advisable to estimate a range of plus or minus 15%, which
is similar to the range used by many investment bankers.
A. True
B. False
6) Sometimes business units provide goods and services to one another. To arrive at consolidated
corporate results, accountants eliminate the internal revenues, costs, and profits to prevent double
counting. Only revenues and costs from external sources remain at a consolidated level.
a) True
7) In calculating and interpreting results when estimating invested capital, start with total assets by
business unit, add estimates for non-opearting assets, and then add estimates of non-interest bearing
operating liabilities.
a) True
b) False
Explanation: To estimate invested capital, start with total assets by business unit and subtract estimates
for non-operating assets and non-interest bearing operating liabilities
8) When valuing a company by summing the business unit values, an analyst should use a corporate
wide cost of capital to value each unit:
a) True
b) False
Explanation: The cost of capital should be computed for each business unit using the beta of its industry
9) List the criteria for assessing whether a model is technically robust with respect to the following
two perspectives:
1. Unadjusted Financial Statements
2. Rearranged Financial Statements
Answer: Unadjusted Financial Statements: The Balance sheet should balance each year, and the
dividends and retained earnings should be congruous with net income
Rearranged Financial Statements: The sum of invested capital + non-operating assets = Cumulative
sources of financing. NOPLAT is the same when calculated from the top down or from the bottom up
10) When analyzing scenarios in a scenario analysis, an analyst should review the assumptions of a
model with respect to four variables. List and explain the four variables.
Answer:
1. Broad Economic Conditions and the sensitivity of the firm's operations to swings in the economy
2. Competitive structure of the industry and the implications the level of competition will have on the
firm's market share
3. Internal capabilities of the company to develop its products on time and to manufacture them within
the expected range of costs.
4. Financing capabilities of the company relative to possible conditions in financial markets.
11) When making forecasts, increasing one variable usually means decreasing another. List three of
the several possible common trade-offs that should be considered in making such forecasts.
1. Sales and prices
2. Lower inventory and higher sales
3. Higher growth and lower margin
1. Which two of the following are likely to vary the most among companies within an industry?
I. Tax Rates
II. Growth
III. ROIC
IV. WACC
a) I and II
b) I and III
c) II and III
d) III and IV
2. Which of the following are reasons that the value-to-EBITA ratio is superior to the price-to-earnings
ratio as a multiple to aid in valuation?
I. The P/E is distorted by capital structure
II. The P/E is distorted by inflation
III. The P/E is distorted by non-operating gins and losses
IV. The P/E is distorted by dividend payouts
a) I and III only
b) II and III only
c) II and IV only
d) I, III, and IV only
3) Comparison of a company's multiples to the arithmetic averages of an industry:
a) Is one of the more recommended practices, but it may not be the best
b) Is the best recommend practice
c) Is not recommended
d) is not possible
4) Increasing growth and ROIC by the same amount and holding taxes and WACC constant will:
a) Increase the value-to-EBITA ratio
b) Not affect the vaue-to-EBITA ratio
c) Decraese the value-to-EBITA ratio
d)Have an undetermined effect on the value-to-EBITA ratio
5) You are analyzing a firm that has a tax rate of 34%, growth rate of 4%, ROIC of 10%, and WACC of 9%.
Given this information, what is the value-to-EBIT ratio?
a) 12.00
b) 10.00
c) 9.45
d) 7.92
6) In estimating and comparing value, the P/E multiple has two major flaws. Which of the following
are those flaws?
I. It is in squared currency units
II. The P/E ratio is affected by a company's capital structure
III. The earnings or net income is calculated after non-operating items
IV. The Market measure of price usually has significant error.
a) I and II only
b) I and III only
c) II and III only
d) II and IV only
7) In estimating and comparing value, empirical evidence shows that forward-looking multiples are
more accurate predictors of value than are historical multiples:
a) True
b) False ---Answer: A – True
9) In estimating value creation, analysts should use EBITA rather than EBITDA because depreciation is
a non-cash item whereas amortization is not.
A) True
B) False
11)List the three requirements for carrying out a careful analysis of comparable multiples:
1. Use the right multiple, which is value-to-EBITA in most cases, when comparing valuations across
companies
2. calculate the multiple in a consistent matter, which means basing the numerator (value) and
denominator (earnings) on the same underlying assets
13) Provide an argument for why EBITA may be superior to EBITDA when computing multiples:
-Answer: EBITA May be superior to EBITDA because the earnings measure should include depreciation.
Although analysts often exclude depreciation because it is a non-cash measure reflecting past cash
outflows, depreciation is important in this case because it gives an indication of what will have to be
invested in the future to replace the existing assets.
1) Which of the following are examples of Non-Operating Assets?
a) Tax Loss Carryforwards (Net Operating Losses)
b) Unconsolidated Subsidiaries
c) Minority Interest
d) All of the above
e) (a) and (b)
f) (b) and (c)
2) Suppose that you are critiquing a valuation of Peet's Coffee (a specialty coffee chain) by Wall St.
Analyst W. Warlock. In Warlock's valuation model, he estimates the following growth rates for cash
flows: 25% annually for years 2010-2015 and 15% annually for years 2016 and beyond. You concluded
that:
a) The analysis is fine
b) Warlock should 'ramp down' the growth rates to a steady state with an interim period, as 15%
annually forever seems to be too high
c) Warlock should keep growth rate for cash flows at 25% for next 5 years and then assume a 5% rate
therafter
d) Warlock should stick with what he knows best - scaring defenseless penguins that come through his
mountains
3) In developing a good model to value a firm in Excel or other spread sheet programs, which of the
following are best practices?
a) Assumptions limited to a few places in the model
b) Hard coded data spread throughout all the various worksheets
c) Color coding to separate different types of data
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) All of the above
4) When possible, in order to forecast revenues going forward, one should:
a) Utilize a top down approach
b) Utilize a bottom up approach
c) Decompose growth into various operating segments of the firm
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) All of the above
5) Which of the following statements are true with respect to forecasting depreciation expenses?
a) Tying depreciation to sales is problematic if purchases of capital are lumpy
b) Tying depreciation to Gross Plant, Property & Equipment is immune to any problems.
c) The easiest method to implement as an analyst is to use equipment purchases and depreciation
schedules
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) All of the above
6) Which of the following are true?
a) The Fama/French model postulates that a firm's excess returns are a function of excess returns on the
market, the size of the firm, and the age of the firm
b) The Arbitrage Pricing Theory (APT) states that many factors affect a firm's returns
c) There is common agreement in academics and in practice that beta is dead
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) All of the above
7) If implemented correctly, one obtains the same dollar estimate for Continuing Value (CVt) in the
Discounted Economic Profit Model as in the standard Discounted Enterprise Value (DCF)
A) True
B) False
8) Which of the following are true with respect to estimating Beta?
a) Raw Regressions to estimate Beta should be done using daily returns
b) Company stock returns should be regressed an equally-weighted portfolio
c) Examining rolling Beta Estimates can help to discern any structural shifts of systematic risk for a
firm
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) All of the above
9) Which of the following are true with respect to estimating the cost of debt for firms?
a) Corporate Bond yield spreads (over US Treasuries) increased significantly from 2004 to 2009 during
the financial crisis
b) Using the yield to maturity (YTM) of a financially distressed firm is the best way to estimate this firm's
cost of debt
c) The coupon rate for a firm's existing debt is the best choice for estimating its cost of debt
d) (a) and (b)
e) (b) and (c)
f) (a) and (C)
g) All of the above
10) Which of the following are true if one chooses to capitalize operating leases for accessing a
company and its valuation?
a) The company's ROIC will decrease vs. not capitalizing operating leases
b) One should also change the weights on financing from debt and equity n the estimation of WACC
c) One should theoretically create both a liability and an asset for these capitalized operating leases
on the balance sheet for calculating certain useful metrics.
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) All of the above
11) Which of the following are examples of Non-Equity Claims that should be subtracted off the
Enterprise Value to arrive at the firm's value of equity?
a) Unfunded or Underfunded Pension Obligations
b) Excess Real Estate
c) Outstanding Employee Stock Options
d) All of the above
e) (a) and (b)
f) (b) and (c)
g) (a) and (c)
12) It's possible to have an acquisition to be accretive to earnings and still destroy value.
a) True
b) False
13) The decay of revenue growth rates to long term norms is quicker than the decay to long term
norms for ROIC rates
a) True
b) False
14) House Depository has accounts receivable days of 15, while its' competitor, High's has accounts
receivable of 22. If all other financial and operating metrics are the same for these two stores, what
can be said about them from this information?
a) House Depository generates cash more quickly than High's
b) High's generates cash more quickly than House Depository
c) House Depository has bigger market share than House Depository
d) High's has bigger market share than House Depository
e) I don't know b/c I don't shop at either
15) Which of the following is true regarding ROIC & Growth in Revenues?
a) ROIC tends to decay to economy-wide norms very quickly (in 1-2 years) for high ROIC firms
b) Growth rates in revenues are very persistent (i.e., firms that have high growth rates in revenues
generally maintain this for 10-15 years)
c) ROIC tends to be higher in industries that employ relatively small amounts of fixed (tangible) assets
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) None of the above
16) Which of the following statements are true?
a) A consumer products company like Johnson & Johnson is likely to have more stable ROICs over time
than a technology company like intel
b) A biotechnology company like Amgen is more likely to have more volatile ROICs than a consumer
products company like Johnson & Johnson
c) A technology company like Intel is more likely to have higher peaks in ROIC than a consumer
products company like Johnson & Johnson
d) (A) and (b)
e) (B) and (C)
f) (A) and (C)
g) (a) (b) and (c)
h) None of the above
17) Using the Enterprise Value multiple recommended in class, which is true?
Firm A
Firm B
2009 EPS
$6.00
$4.00
2010 EPS (Estimate)
$7.00
$5.00
Current Stock Price
$70
$50
a) Faster growth in profits always yield a higher valuation
b) Faster growth in profits always yields a lower valuation
c) Faster growth in profits yields no change in valuation
d) Faster growth in profits sometimes yields a higher valuation, sometimes yields a lower valuation,
and sometimes yields no change in valuation.
18) Using the above information, which of the following are true? (please select best answer)
a) Company A's forward P/E is greater than Company B's
b) Company A's trailing P/E is greater than Company B's
c) Company A's forward P/E is less than Company B's
d) Company A's trailing P/E Is less than Company B's
e) (a) and (b)
f) (a) and (c)
g) (b) and (d)
19) Which of the following are true?
a) Given our discussions in class, the best multiple to use to capture the operations of the firm,
independent of financing, is the P/E ratio
b) Using an operational metric (e.g. EV to number of patents at a firm) is appropriate if it can be tied
to financial value
c) The Enterprise Value /EBITA multiple discussed in class is impacted more by changes in a firm's capital
structure than the P/E ratio
d) (a) and (b)
e) (a) and (c)
f) (b) and (c)
g) All of the above
20) Which of the following are true?
a) EBIT/Interest is the best coverage ratio to examine liquidity for a firm that has lots of operating leases
b) Debt/Equity measures the liability to meet long-term obligations
c) Leverage Ratios are relatively constant across industries
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) (a), (b), and (c)
h) None of the above
21) Suppose that a firm is considering increasing the amount of debt in its capital structure. For this
increase in leverage, the firm's P/E will:
a) Always increase
b) Always decrease
c) Always stay the same
d) It depends on the firm's cost of debt and the magnitude of the P/E Ratio
22) In order for a firm to have a higher peak ROIC, or superior performance, it must have a source of
competitive advantage. Which of these are sources of competitive advantage?
a) Price Premium
b) Cost Competitiveness
c) Capital Efficiency
d) (a) and (b)
e) (a) and (c)
f) (b) and (c)
g) (a) , (b) and (c)
h) None of the above
23) For 2009, Georgetown Party Suppliers (GPS) had an ROIC = 10%, a WACC = 15%, and invested capital
= 10mm. Which of the following are true?
a) Economic Profits equal -$500,000
b) PPS had negative operating profits in 2009.
c) PPS is creating value in 2009 economically
d) (a) and (b)
e) (b) and (c)
f) (a) and (c)
g) (a), (b), and (c)
h) None of the above
24) If done correctly, one should obtain the same value for a firm using the Discounted Cash Flow or
Economic Profit methodologies:
a) True
b) False
25) Given the following information from their BS, what is the appropriate amount of Operating
Working Capital?
Assets Amount
Working Cash 600
Excess Cash 400
Marketable Securities 500
A/R 1000
Inventories 3,500
Current Assets 6,000
Liabilities Amount
Short-Term Debt: 500
A/P: 2,000
Accrued Compensation: 500
Current Liabilities 3,000
a) $3,000
b) $2,600
c) $3,500
d) $2,100
e) $4,000
Note: Excess Cash is not included in OWC CA calculations
_____________________________________________________________________________________
1.1. What is the theme that links most major financial crises and how does the pattern looks?
Aggressive use of leverage, Short term debt is invested in illiquid assets, financing long-term assets
with short-term debt and then when interest rates goes up or the l oans have to be repaid the
investor is forced into a firesale causing the assets to be sold if possible to sell at large underprice.
1.2. Describe how companies in the United States and the United Kingdom are governed, compared to
companies in Continental Europe, for example in the Netherlands and Germany.
The U.S. and the U.K. focuses on shareholder value maximization, whereas in Europe all
stakeholders are considered. (city, workers etc.)
1.3. What is the correlation in the U.S and Europe between total return to shareholders and
employment growth?
There is a positive correlation between shareholders return and employment growth. Companies
with high TRS also have strong employment growth.
2.1. What was the reason the fast growing company Walgreen and the significantly slower growing
company Wrigley, between 1968-2007 had nearly the same shareholder return?
Wrigley had a higher ROIC that compensated for the lower growth in creating shareholders return.
2.2. In the chapter there is an example comparing the two companies Value Inc and Volume Inc. Both
have the same earnings growth. Which of the two companies has the highest value, and why?
The higher ROIC for Value Inc allows it to have lower investments to earn the same level of profits
generating higher cash flows.
2.3. Describe how growth, return on invested capital (ROIC) and the investment rate are tied
mathematically.
Investment Rate = Growth / Return on Invested Capital
ROIC = Growth/Investment Rate
Growth = Investment Rate * ROIC
2.4. Assume a company has a cost of capital that is higher than achieved ROIC. What will happen to
the value of the company if the growth increases?
If a company have a higher cost of capital than achieved ROIC means that growth will destroy value
rather than add to the value.
2.5. Assume a company has a constant growth rate, what will happen to the value if ROIC
increases?
Higher ROIC will always mean higher value, everything else the same.
2.6. Assume a company has a cost of capital that is equal to the achieved ROIC. What will happen to
value if growth increases?
The value will remain the same, since increase in growth is offset by cost of capital.
2.7. What are the conclusions regarding growth strategies based on organic growth, compared to
acquisitions. Which strategy has normally the highest return, and why?
Organic growth has generally higher returns as investments can be scaled or rolled back depending on
the success in progress. Acquisitions require the entire investment plus a premium to be made up front
pushing the ROIC down closer to the cost of capital. Acquisitions also mean higher risk.
2.8. What was the conclusion drawn from the work of Miller and Modigliani, regarding the
relationship between debt, equity, cash flow and value?
The value should not change solely upon change in debt and equity unless the overall cash flows
generated by the company also change. (Excluding the tax-shield and other motivational effects). "How
well a company does should not be dependent on how it decides to finance.
2.9. Why is it not possible to increase the value of a company by borrowing capital and repurchase
shares, even if this leads to an increase in earnings per share?
Because the increase in leverage will make the equity cash flows more volatile (have to pay interest
before paying dividend) and investors wants to be compensated for this by demanding a higher return
which will push up the Required return on Equity and thereby the WACC, offsetting the increase in
cheap debt. This will push down the P/E, although there is an increase in EPS this is offset by the higher
P/E leaving the value constant.
2.10. Define NOPLAT.
NOPLAT = Invested Capital * ROIC, profits generated by the core operations after subtracting the related
income taxes.
2.11. Define invested capital.
Cumulative amount invested in the core operations, primarily PP&E and working capital (WC).
2.12. Define FCF.
NOPLAT - Net investments, cash flow generated by core operations after deducting investments in
new capital.
2.13. Define ROIC.
ROIC = NOPLAT / Invested Capital, the return the company earns on each dollar invested in the business
core operations.
2.14. Define IR in relation to NOPLAT
IR = Net investment / NOPLAT, the portion of NOPLAT invested back into the business.
2.15. Define the value formula when the cash flow in a company is growing at a constant rate.
Value = FCF / (WACC - Growth), Gordons Formula.
3.1. Define TRS.
Total shareholder returns includes any increase in share price with any dividend paid during a period to
provide a true picture of shareholders return over the period.
3.2. Describe in general the expectations treadmill
The expectations treadmill is that expectations of future high performance are most likely already
incorporated in the stock price whereby to make the value of the company go up the performance goals
constantly increase creating an ever faster growing treadmill of higher and higher expectations on the
company.
3.3. Explain why the company Target ended up with higher total shareholder return than Wal-Mart,
although Wal-Mart had better development of important value drivers.
Because it started the given period with lower performance expectations than Wal-Mart, improving its
performance it raised the expectations of future performance in its P/E-ratio
4.1. What is the SCP-structure and which researcher developed the structure further in the beginning
of the eighties?
Michael Porter further developed the SCP-framework in the eighties, SCP stands for Structure-ConductPerformance. The intensity of competition in an industry is determined by five forces, threat of new
entry, pressure from substitute products, bargaining power of buyers, bargaining power of suppliers and
the degree of rivalry among existing competitors. Companies needs to choose strategies that
creates/builds competitive advantages to mitigate the pressure of these forces and achieve greater
profitability.
4.2. Grade the following three sectors according to historical ROIC the past 38 years - Pharmaceuticals,
consumer goods and commodities. What is the reason for the differences in performance?
Pharmaceuticals, Consumer Goods, Commodities. The reason lies in competitive advantage,
differentiation. Pharmaceuticals can develop innovative products that are subsequently protected by
patents, in the consumer goods companies have developed strong brands that makes it hard for new
competitors to gain marketshare. Commodities are standardized products with low differentiations
thereby making it hard to charge any premiums.
4.3. Which are the five sources of competitive advantage, to allow companies to charge price
premiums?
Innovative products (protected by patents or difficult to copy, e.g. Pharmaceuticals through patents,
Apple Ipod hard to copy through design, patents and software). Quality (quality means real or perceived
difference between one product or service and another for which consumers are willing to pay a
premium for. E.g. BMW)
Brand - Hard to distinguish from quality, E.g. Coco-Cola, Perrier, Lacoste and Mercedes-Benz)
Customer lock-in - Locking in the customers through hard/expensive/time consuming to change from
the current solution to another. E.g. Medical Equipment, Microsoft Windows/Office, Bloomberg
terminals. Allows current solution provider to charge premium compared to competitors.
Rational price discipline - There are industries that manages to overcome the forces of competition and
sets their prices so that they earn a reasonable return. Rational pricing discipline works when one
competitor acts as the leader and other quickly replicate its price moves. In addition there must be
barriers of entry. Highly unstable situation.
4.4. Which are the four sources of competitive advantage, to cost and capital efficiency?
Cost efficiency sell products and services at a lower cost than the competition. Capital efficiency selling
more products per dollar invested capital than competitors.
Innovative business method (Dell), unique resources, economies of scale (A greater market share on a
small market is better than a low marketshare worldwide), scalable product/process (Low or negligable
cost of adding one more customer, e.g. Microsoft Office or Media companies).
4.5. Which are the three factors determining if a company can have a sustainable high ROIC?
Length of product life cycle (Cheerios, Palladium, Microsoft), persistence of competitive advantage,
potential for product renewal.
4.6. What was the median ROIC between 1963-2008 for US-based non-financial companies?
10%
4.7. Which type of industry tend to have a high median ROIC? What is the characteristic for this group
of companies?
Pharmaceuticals, software, consumer brand companies and generally industries where sustainable
advantages can be built up such as patents or strong brands.
4.8. Which is most stable over time - ROIC or growth?
ROIC tends to be more stable over time.
4.9. What is the conclusions regarding superior performance in ROIC over time? What is the
conclusion regarding the group of high-performing companies?
Although a reversion to the mean can be traced, high ROIC companies are most likely to continue to
achieve high ROIC over time, as well as low ROIC companies will continue to achieve low ROIC over time.
5.1. It is important to understand the reasons for variations in growth. Which are the three main
components for growth?
Portfolio momentum - organic revenue growth because of overall expansion.
Market share performance - organic revenue growth by gaining or losing share in any particular market.
Mergers & Acquisitions (M&A) - inorganic growth a company achieves when it buys or sells revenues
through acquisitions or divestments.
5.2. Which factor of these three explains most of the growth for large companies in 1999-2006? How
much of the growth rate of 10.1 percent was explained by this factor? Which factor was least
important?
The most important factor to achieving the high 10,1% growth is the Portfolio momentum factor,
second to most important factor is the M&A and the least important factor is the Market share
performance.
5.3. Which three types of growth strategies have a value creation below average?
Gain share from rivals through incremental innovation, gain share from rivals through product
promotion and pricing, make large acquisitions.
5.4. Explain the so-called S-curve in sustaining growth and how it relates to market penetration.
Resembles the PLC curve with early adaptors, then growth takes of. As the product penetration
increases, the growth decreases and the company has to introduce new products or/and find new
markets to keep up the growth.
5.5. What is the only way to sustain consistently high growth?
The only way to achieve consistently high growth is to consistently find new products and new markets,
enter them successfully in time.
5.6. In a study of US-based non-financial companies 1963-2007, there were some conclusions
regarding the sustainability for high growth - which?
The median growth was 5,4%. High growth rate decay very quickly, Extremely large companies struggle
to grow.
5.7. There are three possible explanations to why the inflation adjusted average growth rate of 5.2
percent 1963-2007 is higher than the GDP growth in the U.S of 3.2 percent - which are they?
1) High growth companies are more likely to be publicly traded, and in the survey they only measure
publicly traded companies.
2) Outsourcing of services, which does not show up in the aggregated GDP growth of US but show up in
the sample measured.
3) Global expansion, many companies create products and generate revenues outside the US, will not
affect the GDP growth but the sample growth.
6.1. Explain the four parts in valuing a company according to the DCF-model.
1) Value the company´s operations by discounting the free cash flow using the WACC.
2) Value nonoperating assets, summing the value of operations and nonoperating assets gives
enterprise value.
3) Value all debt and other non-equity claims against the enterprise value. Debt and non-equity claims
include, interest bearing debt, unfunded pension liabilities, employee options and preferred stock.
4) Subtract the value of non-equity from the enterprise value to determine the value of common equity.
To estimate the price per share, divide by number of shares.
6.2. Define the Value of Operations using estimates of free cash flow.
The value of operation equals the discounted value of future free cash flow.
PV of FCF during the explicit forecast period, and PV of FCF after explicit forecast period. Discounted
using the WACC.
6.3. How is the WACC calculated?
The WACC blends the rates of return required by debt holders and equity holders.
WACC= D/(D+E) k_d (1-T_m )+E/(D+E) k_e
This is the case when the company is solely financed by Debt and Common Equity.
D & E are measured using market values.
6.4. Why are non-operating assets valued separately?
Non-operating assets are valued separately since their cash flows are presented separately from the
cash flow from operations. But they do have values that need to be taken into account when valuing the
firm. E.g. equity investments (nonconsolidated subsidiaries), excess cash, tradable securities, customer
financing arms.
6.5. In what way is an SPE (SPV) (like the SIV's) a problem when non-equity claims is to be calculated?
As they may hide potential claims against the companys cash flows, which need to be incorporated in to
the valuation to get a fair value.
6.6. Which are the six most common non-equity claims?
Short-term and long-term Debt, Operating leases, Unfunded retirement liabilities, Preferred stock
(resembles unsecured debt, goes ahead of common equity), Employee options, Minority interest.
6.7. Why should we not divide the equity value by the diluted number of shares?
If we would divide it with the diluted number now we would double count the options´ value and
thereby understate the value true (theoretical) value of the shares
6.8. Define Economic Profit in relation to NOPLAT.
Economic profit measures the value created by the company in a single period.
Economic Profit=Invested Capital × (ROIC-WACC)
Can be rewritten as:
Economic Profit=NOPLAT- (Invested Capital × WACC)
6.9. Define the value of the company at time 0 using economic profit for year 1.
Value_0= Invested Capital_0+(Economic Profit_1)/(WACC-g)
7.1. Define invested capital from the equity liability side of the balance sheet.
Invested Capital=Debt and its equivalents+Equity and its equivalents-Nonoperating Assets.
7.2. Net earnings is the profit available to equity holders. To whom is NOPLAT available to?
NOPLAT is the profit available to all investors. Debt holders, Equity holders and any other types of
investor financing.
7.3. What is the difference between "free cash flow" and "cash flow from operations", reported in the
annual report?
Free cash flow is independent of financing and non-operating items. Unlike cash flow from operations.
(The after-tax cash flow - as if the company held only core operating assets and financed the business
entirely with equity) FCF = NOPLAT + Noncash Operating Expenses - Investments in Invested Capital.
7.4. If ROIC is calculated without goodwill, what does it measure, compared to if goodwill is included
in the calculation?
ROIC with goodwill measures a company´s ability to create value after paying acquisition premiums.
ROIC without goodwill measures the competitiveness of the underlying business
7.5. Name some non-operating assets
Excess cash and marketable securities, certain financing receivables, nonconsolidated subsidiaries and
equity investments, prepaid and intangible pension assets, tax loss carry forwards.
7.6. What is the difference between "operating taxes" and "operating cash taxes"?
Operating cash taxes is the amount of tax actually paid during a period. To derive this number subtract
the increase in net operating deferred tax liabilities (DTLs) from operating taxes. Operating taxes is the
taxes reported in the Income Statement while the cash taxes is the actual tax paid during the period,
that is why you look at the change in deferred taxes.
7.7. Which are the most common "non- cash operating expenses", that you add back when calculating
NOPLAT?
Depreciation, gains or losses related to pensions, embedded interest expenses from operating leases
and restructuring charges.
7.8. Which are the five primary areas in calculating investments in invested capital?
Change in operating working capital (Cash, inventory and other components of working capital,
excluding excess cash, nonoperating assets etc.), Net capital expenditures (Investment in PP&E less BV
of any PP&E sold), Change in capitalized operating leases (Include investments in capitalized operating
leases in gross investment), Investment in goodwill and acquired intangibles, Change in other long-term
operating assets, net of long-term liabilities.
8.1. When should you measure ROIC including goodwill? What is the perspective?
ROIC with goodwill measures the companys ability to create value over and above premiums paid for
acquisitions. ROIC without is a better measure of the company´s core performance compared to its
peers.
8.2. How can you calculate ROIC, using the relationship to revenue?
ROIC is driven by its ability to maximize profitability (EBITA divided by revenues, operating margin),
optimize capital turnover, or minimize operating taxes.
ROIC=(1-Operating Cash Tax Rate) * EBITA/REVENUES * REVENUES/(INVESTED CAPITAL)
8.3. Describe a "line items analysis" for factors in the balance sheet?
Conversion of line items into some type of ratio, e.g. each line item can be taken as a percentage of
revenues. For easier comparison overtime and against peers.
8.4. Why is it better to calculate the ratio for the inventory to cost of goods sold, rather than to sales?
To avoid distortion by changing prices.
8.5. Which are the three major factors that can distort the analysis of year-to-year revenue growth?
Changes in currency values, mergers and acquisitions, and changes in accounting policies.
8.6. If you use EBITDA and EBITDAR to measure ability to meet short-term obligations, which factors
do you compare them to?
EBITDA to interest, measures the company's ability to pay interest using profits without taking from
capital expenditures intended to replace depreciating equipment. EBITDAR to interest and rental
expense measures the ability to meet short-term financial commitments.
9.1. What are the characteristics relating to "the steady state" in the estimation process?
The company grows at a constant rate by reinvesting a constant proportion of its operating profits each
year. And earns a constant rate of return on both existing capital and new capital invested. Resulting in
that the FCF grows at a constant rate and can be value using a growth to perpetuity.
9.2. Which are the six steps in the forecasting process?
1) Prepare and analyze historical financials
2) Build the revenue forecast
3) Forecast the income statement
4) Forecast the balance sheet: Invested capital and non operating assets
5) Forecast the balance sheet: Investor funds
6) Calculate ROIC and FCF
9.3. What differs the top-down approach for revenue forecasting, to the bottom-up approach?
Top-down, estimating the size of the total market, determining the market share, and forecasting the
prices. Bottom-up, use the company's own forecast of demand from existing customers, customer
turnover and the potential for new customers.
9.4. When estimating the income statement, to what factor is the most line items tied to?
Revenues, some line items will be economically tied to a specific asset, e.g. Interest income is usually
generated by cash and marketable securities, thereby tied to them.
9.5. If you are an external analyst (not working in the company), which are the two suggested ways to
calculate estimated depreciation?
Forecast as either a percentage of revenues or as a percentage of PP&E.
9.6. To what should interest expenses be tied to in the estimation process and what is the so called
circularity problem related to this? What is the suggested solution to avoid this problem?
Tie the interest expense/income to the assets/liabilities that generates the income not to total
revenues. Tie the Interest expense to the prior years total debt.
9.7. Why should you not use the statutory tax rate when estimating operating taxes?
Many companies pay taxes at rates below their local statutory rate because of foreign rates and
operating tax credits. Not taking this into account will cause a miscalculation of the FCF.
9.8. How does the "stock approach" to estimating assets differ from "the flow approach"? Which
method is recommended?
The stock approach forecast end-of-year receivables as a function of revenues where as the flow
approach forecasts the change in receivables as a function of the growth in revenues. Koller favors the
as experience shows that the relationship between balance sheet account and revenues (or other
volume measures) is more stable than that between balance sheet changes and changes in revenues.
9.9. Describe the three-step approach to estimating PP&E.
1) Forecast the PP&E as a percentage of revenues.
2) Forecast depreciation, typically as a percentage of gross or net PP&E
3) Calculate capital expenditures by summing the increase in net PP&E plus depreciation.
9.10. How should you treat acquisitions in the estimation process? What is the reason for this
treatment?
We set revenue growth from acquisitions to zero and hold goodwill constant at its current level. This
approach is preferred since empirical literature shows that the typical acquisition fails to create value.
By assuming growth we also make implicit assumptions about the present value of acquisitions. If you
decide to forecast, first asses what proportion of future they are likely to provide, by measuring
historical values and comparing.
9.11. What is "the plug" when estimating investors funds?
The "plugg" is the last items that can be used to balance the balance sheet, these are excess cash, shortterm debt, longterm debt, a new account labeled "newly issued debt" and common stock.
9.12. How does the capital structure (debt or equity) affect the DCF-model? Which factor in the
valuation model is affected?
The capital structure affects the enterprise DCF only through the Weighted Average Cost of Capital
(WACC), thus only a change to WACC will change the valuation.
10.1. Why is it essential to have a thoughtful estimate of continuing value?
Because the estimate of the continuing value accounts for a large percentage of a company´s total
value. E.g in the book between 56%-125%. This is because early cash inflows are offset by high cash
outflows, in CAPEX and Working capital
10.2. Write the recommended formula for calculating the continuing value?
Continuing Value_t=((NOPLAT_(t+1) (1-g/RONIC)) / ((WACC-g))
RONIC = Expected rate of return on new invested capital.
10.3. What is important to take into consideration regarding NOPLAT, when calculating the continuing
value?
The level of NOPLAT should be based on a normalized level of revenues and sustainable margin and
return on invested capital (ROIC). The normalized level of revenues should reflect the midpoint of the
company´s business cycle and cycle average profit margins.
10.4. What is important to take into consideration when the RONIC is included in the calculation of
continuing value?
The expected rate of return on new invested capital (RONIC) should be consistent with expected
competitive conditions. Economic theory suggests that competition will eventually eliminate abnormal
returns. Many companies set RONIC equal to WACC. However for companies with sustainable
competitive advantages, brands, patents etc. You might set RONIC equal to the return the company is
forecast to earn during later years of the explicit forecast period.
10.5. What is important to think of when "g", the growth rate, is included in the calculation of
continuing value?
Few companies can be expected to have a higher growth than the economy for long periods of time.
The best estimate is to set the expected long-term rate of consumption growth for the industry plus
inflation. Also do a sensitivity analysis.
10.6. What is important to remember when the WACC is included in the calculation of the continuing
value?
The WACC should incorporate a sustainable capital structure and an underlying estimate of the business
risk consistent with the expected industry conditions.
10.7. What is the recommended formula for economic-profit valuation?
〖CV〗_t=Economic Profits in Year t+1+Economic Profits beyond Year t+1=
=(〖IC〗_t (ROIC-WACC))/WACC+PV(〖Economic Profit〗_(t+2) )/(WACC-g)
PP. 217-218, Koller et al.
10.8. Does length of (explicit) forecast affect a company's value?
The length of the forecast is important but it doesn't affect the value of the company, it only affects the
distribution of the company´s value between the explicit forecast period and the years that follows.
(Forecast period being, number of years before perpetuity.)
10.9. If a company has 85 percent of the total value connected to the calculation of the continuing
value at the end of the specific estimation period, is this the same as saying that part of the value is
related to a very distant and uncertain future?
No, it is saying that 15% is attributable to the time we can assume the company to make a return higher
than the cost of capital. Have to look broader, look at the Business component approach and the
Economic Profit Approach to get the bigger picture.
10.10. A company is estimated to grow at a rate of 10 percent per year, each year 1 to 10. From year
10 to year 11, the continuing value year, you calculate the growth in revenue of 5 percent and an
increase in investment in working capital by 5 percent. What is the problem with this estimation
technique for working capital, the continuing year?
The increase in working capital is far to large, since Revenues are growing more slowly, the proportion
of gross cash flow devoted to increasing working capital should decline significantly. The increase in
working capital should be the amount necessary to maintain the year-end working capital at a constant
percentage of revenues.
10.11. How can you write the formula for calculating the continuing value, if RONIC is equal to WACC?
CV= NOPLAT_(t+1) / WACC
We expect that the return on new investment will eventually converge to the cost of capital. This is
often the case when there is not a sustainable competitive advantage.
10.12. Why is it wrong to calculate the continuing value the following way: CV = NOPLAT(t+1)/(WACCg)
Using this formula can substantially overstate continuing value since is assumes that NOPLAT can grow
without any incremental capital investments. This is highly unlikely since any growth will require
additional working capital and fixed assets.
10.13. In some cases multiples are used for calculating the continuing value. What is the problem with
this approach?
As the business approaches maturity the P/E will probably decline as the business growth and ROIC will
decrease. So what P/E ratio should you use? Using an arbitrary P/E is not something that is
recommended. Also when a company make an acquisition to make some improvement to the revenues
and then sell it on thinking it will sell for the same P/E this is also not the case since they have already
made the improvements the P/E or the overprice will decline
10.14. In some cases the replacement cost approach are used for calculating the continuing value.
What is the problem with this approach?
The replacement cost approach sets the continuing value equal to the expected cost to replace the
company´s assets. The drawbacks are 1) Not all tangible assets are replaceable, e.g. the organizational
capital can only be valued on the basis of the cash flows. If not the replacement cost may greatly
understate the value of the company. 2) Not all the company´s assets will ever be replaced.
11.1. What is the most important principle underlying a successful implementation of the cost of
capital (WACC)?
Consistency between the components of the WACC and free cash flow.
11.2. To assure consistency the cost of capital must meet six criteria - which?
-> Include the opportunity cost of all investors. Debt, Equity and so on.
-> Must weight each security´s required rate of return by its target market-based weight, not book
value.
-> Any financing-related benefits or costs, e.g. Interest tax shields not included in the FCF must be
embedded into the WACC.
-> Must be computed after corporate taxes.
-> Must be based on the same expectations of inflation as those in the FCF forecast.
-> The duration of the securities used to estimate the cost of capital must match the duration of the
cash flows.
11.3. Write down the formula for calculating the WACC in its simplest form.
WACC=D/V×k_d×(1-T_m )+E/V×k_e
V = Enterprise value, D and E using market-based values not book values. TARGET LEVELS
Tm = Marginal tax rate
Kd = Pretax cost of debt, Ke= Cost of equity.
11.4. The cost of equity is determined by three factors, which?
The risk-free rate of return, the market-wide risk premium and risk adjustments that reflects each
company´s riskiness relative to the average company. (In CAPM through the Beta).
11.5. What model and what factor in that model is used to estimate the company specific risk?
In the book they use the Capital Asset Pricing Model, and within the CAPM you adjust to each
company´s specific risk through the use of the Beta (β).
11.6. If an investment-grade firm with infrequent traded bonds is to be valued, how do you calculate
the cost for debt? What adjustment for tax is necessary?
To estimate the cost of debt of investment-grade firms with infrequent traded bonds we use the
company´s debt rating to estimate the yield to maturity. We adjust this with the marginal tax rate to get
the after tax cost of debt.
11.7. What is the beta value?
Beta represents a stock´s incremental risk to a diversified investor, where risk is defined as the
covariance with the aggregated stock market. Beta measures how much the stock and the market
moves together.
11.8. If a company has a beta of 0.6 and the risk-free rate of return is 3.9 percent and the market risk
premium is 5.4 percent, what is the cost of equity?
E(R_i )= r_f+ β (E(R_m )-r_f )
E(R_i )=3.9%+0.6 (5.4%)= 7.14%
E(R_i) = Cost of equity
11.9. How do you estimate the risk-free rate? What time frame is most common?
To estimate the risk-free rate we use government "default free" bonds. Ideally each cash flow should be
discounted using a government bond with the same maturity. In reality we often use the 10-year zero
coupon government bond (STRIP) to estimate the risk-free rate. Always use government bond yields
denominated in the same currency as the company´s cash flows. This way inflation will be modeled in
accordingly.
11.10. Within what interval does the market risk premium for equity varies?
The market risk premium is believed to vary between 4.5-5.5%.
11.11. Which are the three steps for calculating the historical market risk premium?
Calculate the premium relative to long-term government bonds, use the longest period possible, use an
arithmetic average for longer-dated intervals.
11.12. If returns are volatile, which calculation of the market risk premium gives the highest outcome the arithmetic (simple) average or a geometric average?
The arithmetic (simple) average will always yield a higher outcome than the geometric average. Since
the geometric average squares the measurement error.
11.13. What is the survivorship premium and how high is it, calculated for the US stock market
between 1900-2005?
The survivorship bias refers to the fact that the observable sample used for estimating historical returns
only includes countries with strong historical returns, and not all the stock markets during the period for
various reasons. The survivorship premium of us stock market is 0,8%.
11.14. In a study of US companies between 1962 and 2008 the inflation adjusted market return of
equity was calculated. How high was it? How can you use this figure to calculate the market risk
premium? How high was the market risk premium, calculated this way? How does that compare to
the calculation in assignment 10, above?
Expected market return averaging 7%, when risk free rate (measured through US inflation-protected
securities) are subtracted (-1,6%) we end up with an estimated risk premium of 5,4%
11.15. When calculating beta for Home Depot, monthly data for five years was used. Why not weekly
data? Why not a ten year period?
The measurement period should include at least 60 data points, should be based on monthly data, using
more frequent return periods leads to systematic biases. Using a longer period than 10 years would
underestimate the risk of the company´s business model if they have changed the capital structure or
business model during the period.
11.16. If a stock is rarely traded, is it better to calculate beta on a monthly, weekly or daily basis?
Estimates of beta measured on illiquid stocks are biased downward, since there are days that there
could be no trading beta = 0. Therefore it is recommended to use monthly data which lessen this effect.
Can also used lagged betas.
11.17. Why is it unnecessary to calculate the beta using a global index, instead of a local well
diversified index, like the S&P 500 or MSCI Europe?
Most well-diversified indexes, such as the S&P 500 and MSCI World Index are highly correlated. (95,8%
correlation). Thus the choice of index will only have a small effect on the beta. Local indexes could be
heavily dependent on a few industries or a few companies, this will show the company´s sensitivity to
that industry or that other companies. Therefore it is better to use a larger, non local one
11.18. When calculating the beta in Home Depot the result was that, within two standard deviations,
the beta was between 0.85 and 1.71, which was not particularly useful. How did they proceed to
come up with something more useful? In this concept there is one factor you need to adjust for, to
come up with a beta for an individual company. Which factor?
To improve the precision of betas estimation, use the industry betas since within the same industry
companies should have the same operating beta. To be able to compare them you first have to strip out
the leverage effect. Only then can you compare them.
11.19. If a company has debt below investment grade (rated BB or lower) what method is
recommended when calculating the cost of capital?
For companies with below-investment-grade debt it is recommended to use adjusted present value
(APV) based on the unlevered cost of equity rather than the WACC to value the company.
11.20. What is the reason the calculation of WACC should rely on target weights for debt to value
rather than current rates?
The current rates may merely reflect a short-term swing in the company´s stock price, a swing that has
yet to be rebalanced by management. Using todays estimates may cause you to under-/overestimate
the value of for example the tax shield. To derive the target, look at the current market-value based
capital structure, compare with other companies within the same industry and review management
explicit and implicit approach to financing.
11.21. If a company has a debt to value ratio that differs from the target weight, in a simple scenario,
how can you adjust your valuation?
Decide how quickly the company may achieve its target weights. In the simplest scenario, the company
will rebalance immediately and maintain the new capital structure. In this case use the target weights as
this will give a reasonable valuation rather than make expectations of the future. If not the simplest
scenario you have to start making assumptions on how quick they will return to target and make the
valuation based on those assumptions.
11.22. If you adjust your capital structure for debt-equivalent claims, what other adjustment is
necessary?
Consistency is required between the free cash flow and the cost of capital, if you make any adjustments
for pension in the free cash flow this must be properly represented in the debt portion of cost of capital
also.
12.1. Which are the most common non-operating assets? What other non-operating assets do you
probably need to add, to end up with the total enterprise value?
Excess cash and marketable securities, Excess real estate, nonconsolidated subsidiaries, financial
subsidiary, tax loss carry-forwards, discontinued operations. To determine enterprise value add to the
value of core operations the value on non-operating assets. E.g. excess cash and nonconsolidated
subsidiary.
12.2. If a non-consolidated subsidiary, accounted for according to the equity method, is privately held
- how can you incorporate it in the enterprise value?
If access to financial statement, then perform a separate DCF-analysis of the subsidiary with WACC
based on the subsidiary's cost of financing. Include only the value of owned equity when calculating the
total value of the subsidiary for the main firm.
If no access to financials, use either Simplified cash-flow-to-equity valuation, Multiples valuation,
Tracking portfolio.
12.3. Why is it necessary to treat a finance subsidiary, even 100 percent controlled, as a non-operating
asset in the enterprise value?
Financial subsidiaries differ greatly from e.g. manufacturing or service business, it is critical to separate
them. Failing to do this can distort return on invested capital, free cash flow and the valuation of the
company.
12.4. How should you incorporate a discontinued business in the enterprise value? How do you value
the discontinued business?
Under U.S. GAAP and IFRS the assets and liabilities associated with the discontinued operations are
written down to their fair value and disclosed as a net asset on the balance sheet, the most recent book
value is a reasonable approximation to include.
12.5. How can you value tax losses carried forward and incorporate them in the enterprise value?
Create a separate account for the accumulated tax loss carry-forwards, forecast the development for
this account by adding any future losses and subtracting any future taxable profits on a year-by-year
basis. For each year the account is used to offset taxable profits discount the tax savings as the cost of
debt.
12.6. What is the difference between the total enterprise value and the equity value?
Equity value = Enterprise value - the value of non-equity financial claims. Non-equity financial claims are
found on the liabilities side of the balance sheet and make sure to search through the footnotes for
undisclosed liabilities.
12.7. How should you treat unfunded retirement liabilities when calculating the equity value?
Unfunded retirement liabilities should be treated as debt equivalent and deducted from enterprise
value to determine equity value. Since future contributions to fill unfunded liabilities are tax deductible,
multiply unfunded pension liabilities by 1 minus the marginal tax rate.
12.8. How should you treat a possible liability from pending litigation in the calculation of the equity
value?
When possible estimate the associated expected after-tax cash flows (if the costs are tax deductible)
and discount these at the cost of debt. Assessing the probability of such cash flows are difficult, the
valuation should be interpreted with caution.
12.9. There are three methods used to value convertible debt in the calculation of equity value,
which?
1) Market value
2) Black-Scholes value
3) Conversion value
12.10. If the value of employee stock options are subtracted from the enterprise value as a non-equity
claim, what other adjustment must be done to avoid double accounting?
First, the value of the options that will be granted must be captured in the free cash flow projections of
in a separate DCF valuation. If captured in the free cash flow projections, the value of future options
grants is included in the value of operations and should not be treated as a non equity claim. Secondly,
the value of options currently outstanding must be subtracted from enterprise value as a non-equity
claim.
12.11. If a subsidiary with a minority interest is publicly traded, how can you adjust for the minority
interest in the calculation of the equity value? ...if it is not publicly traded?
If publicly traded use the proportional market value owned by outsiders to deduct from enterprise
value. If not publicly traded perform a separate DCF-analysis, Multiples or Tracking portfolio valuation
and remember to deduct the third party outside ownership.
13.1. There are three steps to take, to secure the valuation model is technical robust, which?
*In the unadjusted financial statement: the balance sheet should balance every year, historically and
forecast years. Check that net income flows corresponds the dividends paid and retained earnings.
*In the rearranged financial statements: check that the sum of invested capital plus non-operating
assets equals the cumulative source of financing. Is NOPLAT identical calculated top down from sales
and bottom up from net income?
*Does change in excess cash and debt line up with the cash flow statement?
13.2. There are four steps to take, to secure the model is economical consistent, which?
*Are the patterns intended? E.g. Does invested-capital turnover increase over time because of sound
economic reasons (economies of scale) or simply because your modeled future capital expenditures as a
fixed percentage of revenues?
*Are the patterns reasonable? Avoid large step changes in key assumptions from one year to the next,
because these will distort key ratios and could lead to false interpretations.
*Are the patterns consistent with industry dynamics?
*Is steady state reached for the company´s economics by the end of the explicit forecasting period? A
company achieves steady state only when the FCF grows at a constant rate.
13.3. If a group has multiple businesses in different business segment, how should that affect your
valuation?
Since the economics for each company´s segments are different, you must determine the company´s
aggregate operating value one business unit at a time. By valuing the entire company with a single
forecast, you risk missing critical trends and consequently distorting the valuation.
13.4. If a group has multiple businesses in different business segment, how should that affect your
calculation of the cost of capital?
Each business unit should be valued at its own cost of capital, because the systematic risk (beta) of
operating cash flows and their ability to support debt - that is, the implied capital structure - will differ
by business unit. To determine each business units cost of capital, you need the units target capital
structure, the units cost of equity and cost of borrowing.
14.1. Why is it better to evaluate the valuation by using a multiple based on EBITA, than a multiple
based on net earnings?
P/E multiple has two flaws, P/E is affected by a company´s capital structure, not just operating
performance. Second, unlike EBITA, net income is calculated after non-operating items such as
amortization of intangible assets and one-time gains and losses. P/E mix capital structure and nonoperating items with expectations of operating performance, a comparison of P/E is a less reliable guide
to companies´ relative value than a comparison of EV to EBITA.
14.2. Within what interval did the EV/EBITA-multiple fell for a majority of the non-financial companies
in the S&P index in December 2009? What was the most frequent single EV/EBITA-multiple at that
time?
Between 7 and 11 times EBITA, single most frequent was 9 times.
14.3. a) Why EV/EBITA and not EV/EBIT? b) Why EV/EBITA and not EV/EBITDA?
a) Because Amortization (depreciation of intangibles) is an accounting artifact that will distort an
enterprise multiple. For most firms EBITA leads to a better EV multiple than EBIT.
b) Depreciation is a noncash expense, reflecting sunk costs, not future investment. For many industries,
depreciation of existing assets is the accounting equivalent of setting aside the future capital
expenditure that will be needed to replace the assets. Thereby subtracting depreciation from the
earnings of such companies therefore is necessary to understand their true value. (Leasing a fleet vs
Buying a fleet, e.g. Ryanair vs EasyJet)
14.4. Why should you use a forward-looking multiple, than an historical multiple?
The denominator should use forecast profits, unlike backward looking multiples, forward-looking
multiples are consistent with the principles of valuation. In particular that a company´s value equals the
present value of future cash flows, not sunk costs. Second, forward looking earnings are typically
normalized, meaning they better reflect long-term cash flows by excluding one-time past charges.
Empirical evidence exists.
14.5. There are two major techniques for finding the correct peer group to a company, which?
Check if the firm discloses competitors in its annual report. Check industry classification systems, such as
Standard Industry Classification (SIC) or Global Industry Classification Standards (GICS).
14.6. Compared to a EV/EBITA-multiple, what additional important restrictions does the Price/Salesmultiple require?
The Price/Sales or EV/Revenues multiple implies that the operating margin on the company's existing
business is similar all over. Limiting to the EV/Sales multiple limits the analysis and when the earnings
are volatile it fails to represent the long-term operating potential of the firm.
14.7. There are two cautionary notes about using non-financial multiples to analyze and value a
company, which?
1) Nonfinancial multiples should be used only when they provide incremental explanatory power over
financial multiples. If they cant translate the nonfinancial multiples into financials then the multiple is
useless.
2) Nonfinancial multiples like all multiples are relative valuation tools, they measure one valuation
against another firm's valuation.
15.1. What is the average return on US equities the past 200 years, adjusted for inflation?
US equities over the past 200 years have on average achieved total returns to shareholders of about
6,5% annually adjusted for inflation over the period.
15.2. What is the median P/E-ratio in the US stock market over time?
Long-term average P/E around 15, The median over the time is slightly less than 15.
15.6. How has the actual P/E-ratio for the US stock market developed since 1962, compared to the
"fundamental" P/E calculated by the use of a DCF-model?
It fits really well, short period of times where a deviation from the fundamentals can be observed
followed by a correction towards the fundamentals in a few years.
15.7. What is the relationship between companies achieved ROIC and the relative market value for a
given level of revenue growth? At what level of ROIC does an increase in revenue result in a decrease
in value?
The greater the positive spread between ROIC and WACC the greater valued will an increase in growth
add, similarly if ROIC is less than WACC, negative spread a higher growth will destroy value.
15.8. Assume a three years investment horizon, what is most important for total return to
shareholders (TRS) - a high ROIC or to exceed expectations? Within which time-horizon will probably a
high achieved ROIC be the best investment tool?
For a short investment period of 3 years to exceed expectations will be more important to shareholders
return. As the period increases the higher ROIC becomes more important, and in the long run moving
toward 10 yrs the ROIC is the most important factor where as the expectations have low effect.
16.1. Companies try to avoid earnings surprises in three ways, which? Which of the three affect
current and future cash flow, and possible the value? Give an example.
1) Try to lead analyst to adjust their earning forecast by gradually providing new information.
2) Manage the earnings toward the analyst´s target, but in a manner that have no impact on value. E.g.
Firms can decide when to recognize sales and earnings on long contracts. They can also choose to
capitalize customer acquisition costs and R&D expenses, in a way of boosting reported earnings. These
action do not directly affect the cash flows of the company.
3) Changes to a firms business, actions that directly effects a firms current and future cash flows and
possibly value. E.g. reducing marketing expenses, providing customer incentives, or deferring
divestments to meet a profit target. They can also time sale of real estate, assets or whole businesses.
16.2. What was the conclusion regarding earnings volatility and market value in a research conducted
by Koller and Rajan on 1500 European companies between 2000 and 2007? Did this study confirmed
or rejected earlier studies?
The study confirmed earlier studies, the variability in earnings growth rate have no meaningful effect on
shareholder returns or value.
16.3. How much of total return to shareholders (TRS) over a five year period was explained by longterm earnings growth, ROIC and industry sector? How much of TRS was explained by earnings
variability?
34 % was explained by long-term earnings growth, ROIC and industry sector. Earnings variability did not
explain market performance to any significant degree at all.
16.4. How many companies in the study had stable earnings growth during the seven years period?
How many had stable earnings growth for a four-year period?
Walgreens was the only with steady earning growth in the 7-year period. Including Walgreens another
four firms hade a stable earnings growth for a four-year period.
20.1. Which are the financial value drivers?
Long-term growth, Return on Invested Capital (ROIC), Cost of Capital (WACC)
20.2. Which are the short-term value drivers?
Sales Productivity, Operating Cost of Productivity, Capital Productivity.
20.3. Which are the long-term value drivers?
Strategic Health *Core Business, *Growth Opportunities.
21.1. Acquisitions tend to occur in waves. What three factors tend to drive these waves?
Rising stock prices, managers want to further tap into the rising stock price by extending the firms.
Low interest rates stimulate acquisitions. Especially highly leveraged ones.
One large acquisition in one industry tends to encourage others in the same industry
21.2. What was the conclusion in a study by McKinsey between 1997 and 2009, regarding the value
creations from acquisitions?
They found that the combined value of the acquirer and target increased by about 4% on average.
21.5. Which are the three characteristics that can be identified that differentiate deals that are
successful, in terms of the return to the acquirer's shareholders?
1) Strong operators are more successful, acquirers whose earnings and share price grow at a rate above
industry average for three years before the acquisition earn statistically significant positive returns on
announcement.
2) Low transaction premiums are better, acquirers paying high premiums earn negative returns on
announcement.
3) Being the sole bidder help, acquirer stock returns are negatively correlated with the number of
bidders, the more companies attempting to buy the target, the higher the price.
21.6. Which four characteristics do not matter?
Size of the acquirer relative to the target, Whether the transaction increases or dilutes EPS, The price-toearnings (P/E) ratio of the acquirer relative to the target´s P/E, The relatedness of the acquirer and
target, based on Standard Industrial Classification (SIC) Codes.
21.7. Which are the five archetypes that constitutes an acquisition that creates value?
1) Improve the performance of the target company.
2) Create market access for the target´s (or in some cases, the buyer´s products)
3) Acquire skills or technologies more quickly or at lower cost than they could be built in-house.
4) Pick winners early and help them develop their business.
23.1. What are the key benefits with increased leverage?
Tax savings & Reduction of corporate overinvestment due to fiscal discipline created by increased debt.
23.7. There are three types of financial coverage ratios, which?
Coverage = EBITA / Interest or EBITDA / Interest or Net Debt / EBITDA
23.8. What median interest coverage ratio (EBITA/interest) has companies in the group S&P AAA
rating (approximately)? What is the median ratio for companies in S&P BBB and BB rating respectively
(approximately)?
AAA approximately 24, BBB approximately 6 and BB approximately 4.
23.9. What are the drawbacks in using leverage (debt to market value of equity) as a way to measure
and target a company's capital structure?
Companies can have very low leverage in terms of market value but still be at high risk if their short
term cash flow is low relative to interest payments. Secondly, the market value can change radically,
making leverage a fast-moving indicator.
23.10. Investors typically interpret share purchases positively for four major reasons, which?
1) Share buybacks indicates to investors that management believes the company´s shares are
undervalued.
2) Share buybacks signals that managers are confident of strong future cash flows to support future
investments and debt commitments.
3) Signals that the company will not spend it excess cash on value-destroying investments.
4) Can result in lower taxes for investors than dividend payment in countries where capital gains are
taxed at lower rates.
25.2. There are two unsuitable alternatives to calculating taxes, which?
Using the company's statutory tax rate or the company's effective rate with no adjustments.
25.3. What is the problem with using the statutory rate?
Typically leads to an upward-biased estimate of operating taxes, fails to recognize that foreign earnings
are often taxed at different levels.
25.4. What is the problem with using the effective tax rate?
Handles foreign earnings properly but does not exclude one-time non-operating items. Can lead to a
biased (and volatile) estimate of operating taxes.
25.5. How can we convert operating taxes to operating cash taxes?
Converting operating taxes to operating cash taxes, subtract the increase in net operating deferred tax
liabilities from operating taxes. To determine the portion of deferred taxes related to ongoing
operations, investigate the income tax footnote.
26.1. Which are the typical non-operating expenses?
Amortization expense, restructuring charges, unusual charges (e.g. litigation expense), asset write-offs,
goodwill impairments and purchased R&D.
26.2. Describe the three-step process to find non-operating expenses.
1) Reorganize the income statement into operating and nonoperating items.
2) Search the notes for embedded one-time items.
3) Analyze each extraordinary item for its impact on future operations.
26.3. How should you treat amortizations of acquired intangibles when calculating NOPLAT?
In most circumstances you should not deduct amortization from operating profits to determine NOPLAT.
26.4. What effect has write-downs of goodwill on ROIC the coming years? What is the recommended
treatment to avoid this?
ROIC can dramatically rise following a write-down, the resulting balance sheet value understates the
historical investment made by shareholders. To counteract this effect treat assets write-downs and
write-offs as nonoperating, and add cumulative write- downs to invested capital.
26.5. Which are the two major write-offs?
Goodwill impairments, Purchased R&D Expenses
26.6. Is restructuring charges operating or non-operating? What is important in that decision?
If the restructuring charge is unlikely to recur treat is as nonoperating. If however a pattern of ongoing
restructuring emerges, further analysis is needed.
26.7. Is litigation charges operating or non-operating? What is important to consider?
If the litigation charge recurs frequently and grows with revenue, treat the charge as operating. If the
litigation cost is truly a one-time expense treat is as nonoperating and value any claims against the
company separately from core operations.
26.8. Why should gains and losses on the sale of assets be treated as non-operating?
When an asset´s sale price differs from book value, the company recognize a gain or loss. Since current
gains and losses are backward looking (value have been created/destroyed in the past) treat them as
nonoperating.
27.1. Which are the two most common forms of off-balance-sheet debt?
Operating leases and securitized receivables.
27.2. What effect has an operational lease on profits and assets, compared to owning the asset?
A company that chooses to lease its assets will have artificially low operating profits (because rental
expenses include and implicit interest expense) and artificially high capital productivity (because the
assets do not appear on the lessee´s balance sheet). Although the effects counteract each other, the net
effect is an artificial boost in ROIC.
27.4. Explain receivables securitization.
It is a process where the company sells its account receivables to another company, although the
receivables are owned by someone else, the original company continues to process and collect them. By
selling a portion of the receivables the company reduce accounts receivables on the balance sheet and
increase cash flow from operations on the accountant´s cash flow statement.
27.5. Why are the improved key-ratios from a receivable securitization misleading?
The improved accounting metrics are misleading. In reality the company pays a fee for the arrangement,
reduces borrowing capacity and pays higher interest rates on unsecured debt
27.6. Which are the three steps involved in how to incorporate excess pension assets and unfunded
pension liabilities into enterprise value?
1) Identify excess pension assets and unfunded liabilities on the balance sheet. Excess pension assets
should be treated as nonoperating and unfunded pension liabilities should be treated as debt
equivalent.
2) Add excess pension assets to and deduct unfunded pension liabilities from enterprise value.
3) To reflect accurately the economic expenses of pension benefits given to employees, remove the
accounting expense from cost of sales and replace it with the service cost and amortization of prior
service costs reported in the notes.
28.1. There are three reasons for capitalizing R&D, which?
1) The represent historical investment more accurately.
2) To prevent manipulation of short-term earnings.
3) To improve performance assessments of long-term investments.
28.2. Will the accounting treatment of R&D affect the valuation of the company - why or why not?
Changing the accounting treatment of R&D can change perception of a company´s performance, it will
not affect the company´s valuation. Cash outflows related to R&D will appear either in the income
statement when expensed or in the investing section when capitalized. Thus FCF and consequently the
valuation are unaffected by how R&D is treated.
28.3. What other expenses are suitable for capitalization?
If access to internal company data the same process can be applied to any expense resulting in longterm benefits. E.g. building a brand, expanding distribution channels or developing internal talent.
30.1. Which four issues arise in cross-border valuations?
1) Forecasting cash flows in foreign currency and domestic currency.
2) Estimating the cost of capital in foreign currency.
3) Incorporation foreign-currency risk in valuation.
4) Using translated foreign-currency in financial statements.
30.2. Describe the so-called spot rate method for valuing foreign cash flows.
Project foreign cash flows in the foreign currency and discount them at the foreign cost of capital. Then
convert the present value of the cash flows into domestic currency using the spot exchange rate.
(Calculate EVforeign => Convert using spot rate)
30.3. How does the spot rate method differ from the forward rate method?
Spot rate calculates all cash flows to present value and then converts them using the current spot rate.
The forward rate method uses information about future cash flows and converts each future cash flow
to domestic currency using estimates of forward exchange rates. The converted cash flows are then
used to estimate the enterprise value. Spot method is less complex and needs less information.
Forward-rate method often requires that synthetic forward exchange rates to be calculated because
there is often only up to 18 month provided.
30.5. What is best - analyzing the historical performance for a foreign business in the foreign currency
or in the parent company's currency?
When analyzing performance of a foreign business it is best to use the foreign currency.
34.1. Describe the four areas in the valuation process for high-growth companies?
Begin with the future, not the past (sizing potential market, level of sustainable profitability, necessary
investments). Then work backward to link the future to current performance (also try to find expensed
investments and capitalize theses). Develop multiple scenarios of the market's development (total size,
competitive entry etc.). Apply probabilistic weights to each scenario (use weights consistent with longterm historical evidence on corporate growth).
34.2. In the first area of the valuation process, some examples of key-ratios are recognized - which?
Penetration rates, average revenues per customer and sustainable gross margins.
34.3. How far in the future does stable economics probably lie for a start-up?
Since mot high-growth companies are start ups stable economics lie at least 10-15 years in the future.
35.1. What is the reason volatility in earnings does not transfer into volatility in a DFC-calculated
value?
DCF reduces future expected cash flows to a single value, any single year volatility is unimportant. Only
the long-term trend really matters.
35.2. In practice, does the share prices follow the stable DCF-calculated value or the volatile earnings?
The share price of cyclical are less stable than the DCF-model would predict. The share price are affected
by the EPS.
36.1. Which are the three types of activities that generate income in a bank?
Net interest income (difference between deposits and loans, net interest income)
Fee and commissions income (for services including advisory, underwriting etc.)
Trading income (trading of instruments over the counter, exotic products)
36.2. Why is it not possible to do an enterprise discounted cash flow valuation (DCF-valuation) on a
bank?
Because we cannot value a banks operations separately from interest income and expense, them being
a bank's core operations. Operating and financing decisions are not separable in the valuation of a bank.
36.3. Explain the equity DCF-method used in valuing banks.
Equity value equals the PV of its future cash flow to equity discounted at the cost of equity.
36.4. In using the equity DCF-method the key-ratio ROIC is replaced by another key-ratio - which?
Return on equity (ROE)
36.5. Explain the pitfalls of equity DCF valuation relating to the impact of leverage and the business
risk.
A bank's equity beta is a weighted averaged of the betas of all its loan and deposit businesses. Projecting
significant changes in a bank's asset or liability composition or equity capital ratios you cannot leave the
cost of equity unchanged.
36.7. Explain the term Risk Weighted Assets (RWA).
A bank's asset portfolio weighted by the riskiness of different classes of borrowers or investments.