FINA4204 midterm

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FINA4204 midterm
2015-10-15 05:58:03
FINA4204 midterm

FINA4204 midterm
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  1. Discount FCFE byto get...
    • Required return of equity from CAPM
    • equity value
  2. Discount FCF by or , plus PV(TV), to get ….
    • Cost of capital, WACC
    • enterprise value
  3. Calculate FCF with EBIT (plus transform capex and dpn)
    EBIT*(1-t) + dpn – change in NWC – capex (adjusted by 3 items), which equals

    EBIT*(1-t) – change in NWC – change in net fixed asset
  4. Calculate FCF with EBITDA

    FCF = EBITDA*(1-t) + Dpn (t) – change in NWC – capex

  5. Calculate EBIT (plus breakdown of costs)

    • Revenue – operating cost, which equals
    • Revenue – (COGS + dpn + SGA)

  6. Calculate FCFE
    Net income, adjusted by 3 items, + net increase in debt
  7. Calculate net increase in debt
    New issue - principal repayments
  8. Calculate FCFC
    Interest expense (1-t) –net increase in debt
  9. Initial NWC and fixed asset requirements appear in … and … in DCF model

    • When calculating change in net fixed asset and change in NWC
    • When calculating free cash flow(negative initial cash flow)

  10. The firm reaches terminal growth after 2020, calculate TV
    TV2020 = FCF2021/(r-g)
  11. Calculate firm value (2 ways)
    • Price per share*shares outstanding + interest bearing debt
    • PVs of FCFs + PV (TV) + excess cash at T0
  12. Calculate Enterprise value (2 ways)
    PVs of FCFs + PV (TV) (ie. FCF1/(WACC-g)

    (Price per share*shares outstanding + interest bearing debt)[firm value] – excess cash at T0
  13. Line items on DCF model
    Year, period, NOPAT, - change in NWC, - changing in net fixed asset>free cash flow

    PV of FCF, sum of PV of FCF from t=0 to t=5(at t=0), terminal value at t=5, PV of TV(at t=0), Enterprise value
  14. Formula of PV(annuity)
  15. Formula of PV(growing annuity)


  16. Formula of DDM

    P0 = D1/(r-g)

  17. Verbal: in year 2 through 5, dividend is expected to grow at 15%; after year 5, dividend will grow at 10%

    D2=D1*1.15…..D5=D4*1.15; D6=D5*1.1

  18. ROE decomposition

    =ROA * leverage

    =Net profit margin * asset turnover *financial leverage

    =net profit margin*equity turnover
  19. AR turnover + days receivable outstanding
    Sales on credit/avg AR (the higher the better)

    360/ AR turnover
  20. Inventory turnover calculation; it means///
    COGS/avg inventory

    how quick is inventory selling
  21. Calculate purchases

    Purchases = COGS + change in inventory

  22. AP turnover

    Purchases/avg AP (the lower the better)

  23. The ability of firm to pay ST obligations: use what ratio and Calculate

    Current ratio: current asset/current liability

  24. Forecasting: treasury stock as plug or B/S: A>L+SE means….
    A<L+SE means…
    Treasury stock reissue(+SE), treasury stock repurchase(-SE)
  25. Forecasting: investing CF-acquisition of PPE
    change in Net PPE + dpn
  26. G, b, r
    G = br
  27. DDM with EPS
    P0 = EPS0(1-b)(1+g)/(k-g)
  28. Current PE (+mutation)
    P0/EPS0 = (1-b)(1+g)/(k-g)
  29. Forward PE (+mutation)
    P0/EPS1 = (1-b)/(k-g)
  30. An undervalued company is one that…
    Has low PE

    High expected growth in earnings (ROE)

    Low risk(low K, low leverage)

    *PE is also affected by payout policy
  31. companies that attain growth more efficiently by investing less in better return projects will have....PEG
  32. companies with very high or very low growth will have .. PEG than firms with average growth. The bias is worse for .....stocks
    • higher;
    • low growth
  33. Calculate PEG; when PEG<1, stock is...
    • PE/expected growth in earnings;
    • undervalued
  34. PBE with ROE (+mutation); hence price-book equity ratio of a stable firm is determined by ….

    • PBE = ROE1 * payout ratio /(k-g)
    • =(ROE1 – g) / (k-g);
    • Difference between ROE1 and k

  35. Calculate PB (2 ways)
    MV(equity)/BV(equity) OR

    Price per share/BV per share
  36. Higher risk firm has…. PE


  37. Firms with lower reinvestment needs, thus higher payout ratio, have… PE


  38. Firms with …. Growth rates will have a …. PEG than firms with average growth rates
    Very low or very high
  39. ROI - what is I
    WC investment + capex investment
  40. when is a stock undervalued with ref to the PB ratio
    PB <1 and ROE1 > r
  41. generally, ... and ... will result in a high PB ratio
    high payout, high growth
  42. when growth increase and ROE>r, PB...;
    when growth decrease and ROE<r, PB...
    increase; increase
  43. A high P/B ratio stock commonly has a correspondinglyROE
  44. Advantage of price to sales ratio
    Startups won’t have positive income

    Difficult to manipulate

    Not as volatile as PE multiples

    Evaluate the effects of changes in pricing policy or corporate strategy
  45. Calculate PS ratio; similarly, net profit margin is the key driver ofratio
    Net profit margin * (1+g) * (1-b) / (k-g);

  46. Advantages of EV/EBITDA
    For firms with net loss

    For firms with significant noncash expenses

    Comparable across firms with different capital structure
  47. firms with larger net operating loss have…. EV/EBITDA
  48. EV/EBIT should be used for... because....; if EV/EBITDA is used, operating CF is ...and EV/EBITDA is ..., making this stock look cheap
    • capital intensive companies because these companies report significant depreciation, thus EBITwhich include depreciation, better represent these companies;
    • overstated ;
    • understated
  49. EBIT is a good proxy for ... while EBITDA is a good proxy for ...
    • free cash flow;
    • operating cash flow
  50. as cost of capital increases, EV/EBITDA ….
  51. As tax rate increases, EV/EBITDA...
  52. as depcreciation as a proportion of EBITDA increases, EV/EBITDA ... because...
    • increasses;
    • more tax saving, higher EV
  53. what is included in D of firm value
    • ST: note payable
    • LT: any debt
  54. what is the value of the firm...."value" means?
    firm value
  55. what is included in nonoperating asset
    • excess cash
    • note receivable
    • marketable securities
  56. g, payout, ROE equation
    ROE*payout = ROE -g
  57. financing cash flows
    • new stock/debt issue 
    • -dividend
    • -treasury stock
    • -repayment on debt
  58. your opinion of fair PE can be express as
    (1+g)/(r-g) [your belief] * dividend yield * current PE