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Discount FCFE by…to get...
 Required return of equity from CAPM
 equity value

Discount FCF by … or … , plus PV(TV), to get ….
 Cost of capital, WACC
 enterprise value

Calculate FCF with EBIT (plus transform capex and dpn)
EBIT*(1t) + dpn – change in NWC – capex (adjusted by 3 items), which equals
EBIT*(1t) – change in NWC – change in net fixed asset

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

Calculate EBIT (plus breakdown of costs)
 Revenue – operating cost, which equals
 Revenue – (COGS + dpn + SGA)

Calculate FCFE
Net income, adjusted by 3 items, + net increase in debt

Calculate net increase in debt
New issue  principal repayments

Calculate FCFC
Interest expense (1t) –net increase in debt

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)

The firm reaches terminal growth after 2020, calculate TV
TV2020 = FCF2021/(rg)

Calculate firm value (2 ways)
 Price per share*shares outstanding + interest bearing debt
 PVs of FCFs + PV (TV) + excess cash at T0

Calculate Enterprise value (2 ways)
PVs of FCFs + PV (TV) (ie. FCF1/(WACCg)
(Price per share*shares outstanding + interest bearing debt)[firm value] – excess cash at T0

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

Formula of PV(annuity)
C/r*(11/(1+r)^T)

Formula of PV(growing annuity)
C/(rg)*(1(1+g)^T/(1+r)^T)


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

ROE decomposition
=NI/equity
=ROA * leverage
=Net profit margin * asset turnover *financial leverage
=net profit margin*equity turnover

AR turnover + days receivable outstanding
Sales on credit/avg AR (the higher the better)
360/ AR turnover

Inventory turnover calculation; it means///
COGS/avg inventory
how quick is inventory selling

Purchases = COGS + change in inventory

Purchases/avg AP (the lower the better)

The ability of firm to pay ST obligations: use what ratio and Calculate
Current ratio: current asset/current liability

Forecasting: treasury stock as plug or B/S: A>L+SE means….
A<L+SE means…
Treasury stock reissue(+SE), treasury stock repurchase(SE)

Forecasting: investing CFacquisition of PPE
change in Net PPE + dpn


DDM with EPS
P0 = EPS0(1b)(1+g)/(kg)

Current PE (+mutation)
P0/EPS0 = (1b)(1+g)/(kg)

Forward PE (+mutation)
P0/EPS1 = (1b)/(kg)

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

companies that attain growth more efficiently by investing less in better return projects will have....PEG
higher

companies with very high or very low growth will have .. PEG than firms with average growth. The bias is worse for .....stocks

Calculate PEG; when PEG<1, stock is...
 PE/expected growth in earnings;
 undervalued

PBE with ROE (+mutation); hence pricebook equity ratio of a stable firm is determined by ….
 PBE = ROE1 * payout ratio /(kg)
 =(ROE1 – g) / (kg);
 Difference between ROE1 and k

Calculate PB (2 ways)
MV(equity)/BV(equity) OR
Price per share/BV per share

Higher risk firm has…. PE

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

Firms with …. Growth rates will have a …. PEG than firms with average growth rates
Very low or very high

ROI  what is I
WC investment + capex investment

when is a stock undervalued with ref to the PB ratio
PB <1 and ROE1 > r

generally, ... and ... will result in a high PB ratio
high payout, high growth

when growth increase and ROE>r, PB...;
when growth decrease and ROE<r, PB...
increase; increase

A high P/B ratio stock commonly has a correspondingly …ROE
High

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

Calculate PS ratio; similarly, net profit margin is the key driver of …ratio
Net profit margin * (1+g) * (1b) / (kg);
EV/sales

Advantages of EV/EBITDA
For firms with net loss
For firms with significant noncash expenses
Comparable across firms with different capital structure

firms with larger net operating loss have…. EV/EBITDA
higher

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 EBIT，which include depreciation, better represent these companies;
 overstated ;
 understated

EBIT is a good proxy for ... while EBITDA is a good proxy for ...
 free cash flow;
 operating cash flow

as cost of capital increases, EV/EBITDA ….
decrease

As tax rate increases, EV/EBITDA...
Decreases

as depcreciation as a proportion of EBITDA increases, EV/EBITDA ... because...
 increasses;
 more tax saving, higher EV

what is included in D of firm value
 ST: note payable
 LT: any debt

what is the value of the firm...."value" means?
firm value

what is included in nonoperating asset
 excess cash
 note receivable
 marketable securities

g, payout, ROE equation
ROE*payout = ROE g

financing cash flows
 new stock/debt issue
 dividend
 treasury stock
 repayment on debt

your opinion of fair PE can be express as
(1+g)/(rg) [your belief] * dividend yield * current PE

