Part III-8 Using Sustainability Data in Financial Valuation

Question 1

The XX rate is used when discounting future cash flows to their present value

Answer 1

discount rate

Question 2

The XX rate is used when going from the present to the future value

Answer 2

interest rate

Question 3

What is the cash left over after the company spends what is necessary to keep growing at its current rate?

Answer 3

Free cash flows

Question 4

What is the cost of a company’s funds - how much it costs to borrow, or the rate of return required by investors to justify investment, given the risk

Answer 4

Cost of capital

Question 5

T/F - All else being equal - a risky company’s future cash flows are worth less (in terms of present value) than those of a stable, predictable company

Answer 5

True

Question 6

What is the value of a company beyond the period in which future cash flows can be estimated?

Answer 6

Terminal value

Question 7

How can increased revenue from products designed for use-phase resource efficiency help identify cash flows in the Chemicals industry?

Answer 7

Companies that develop cost-effective solutions to address customer desires for more efficient products may benefit through increased revenue, as such products are likely to allow for price premiums and higher sales

Question 8

What is operating free cash flow?

Answer 8

Net operating profit after tax (NOPAT)

Question 9

T/F - Lower costs (due to energy efficiency, etc. ) can increase projected net cash flows

Answer 9

True

Question 10

T/F - SASB standards often lend insight into losses related to fines and settlements and the price of key inputs for value creation

Answer 10

True

Question 11

T/F - When an asset is less useful for generating revenues, it reduces expected cash flows

Answer 11

True

Question 12

What is the impact on capital expenditures if a company is facing GHG emissions regulations and restrictions on coal generation?

Answer 12

1- If a company plans to transition some coal-fired generators to other less carbon intensive fuel sources, an analyst may adjust CapEx forecasts up and assume lower depreciation rates
2- If the company used strictly coal-fired generators, these may face faster depreciation due to need to dispose under GHG emissions regulations

Question 13

What is an example of an on balance sheet intangible asset?

Answer 13

Goodwill related to a brand

Question 14

What is an example of an off balance sheet intangible asset?

Answer 14

The difference between book value and market value of a firm

Question 15

To understand impacts on company value and to manage value accordingly as it relates to off balance sheet impacts on company value, users must have a robust understanding of what?

Answer 15

Company’s value creation model;and

The non-financial factors that drive performance

Question 16

Poor management of community relationships is an example of what?

Answer 16

Off balance sheet intangible

Question 17

T/F - Intangible value is often quantitative in nature

Answer 17

False - qualitative

Question 18

T/F - increases in ESG-related liabilities decrease a company’s net working capital, thus reducing future cash flows -

Answer 18

True

Question 19

In DCF, increased risk equates to (increased/decreased) discount rate and, all else being equal, (lower/higher) valuation

Answer 19

increased, lower

Question 20

Disclosures on operational performance data usually have impacts on XX

Answer 20

• expenses and/or revenues (i.e. how you manage your business and associated revenues and costs)

Question 21

Disclosures on current financial position usually have impacts on XX

Answer 21

asset and liabilities (assets i.e. valuation of certain assets, capital expenditures, which may make it harder/easier to do business); or liabilities, legal fines which may show up as expenses and increase cost of capital

Question 22

The XX is weighted according to the proportion of overall financing it provides to the company (i.e. if debt interest rate is 10% and it provides 60% financing, the cost of capital is 6% - plus the cost of equity)

Answer 22

cost of capital

Question 23

What is the measure of the volatility of a company (or stock)?

Answer 23

Beta

Question 24

T/F - Beta of >1 indicates that the company’s stock price is more volatile than the market - more volatility suggests higher risk -

Answer 24

True

Question 25

T/F - Beta of <1 indicates that the company’s stock price is less volatile than the market - less volatility suggests lower risk

Answer 25

True

Question 26

the difference between the yield of a security at the risk-free rate of capital and that of another debt security with the same time to maturity but different, riskier credit quality

Answer 26

Credit spread

Question 27

Where a borrower is less likely to be able to repay its debt, the lender will require a XX rate and, all else being equal, the credit spread will be XX. higher

Answer 27

higher, higher

Question 28

How are green bonds and sustainability-linked bonds different?

Answer 28

Thematic green bonds are typically used to fund specific projects with sustainability outcomes,whereas sustainability-linked debt financing instruments are used by lenders to incentivize the sustainability performance of the borrower itself.

Question 29

What channel of impact is the following? Through market share and pricing power. Often:
Progressive
High probability
Near to medium term
Direct

Answer 29

Revenues

Question 30

What channel of impact is the following? What is an example, and how can it impact fundamental analysis?
Impact on intangible assets (brand). Often:
Progressive
High probability
Long term
Indirect

Answer 30

Revenues - intangible assets; example ratio of diversity at the company; can impact intangibles through reputation and ultimately revenue growth

Question 31

What channel of impact is the following?
Impact on operational efficiency and costs. Often:
Progressive
High probability
Near term
Direct

Answer 31

Expenses

Question 32

What channel of impact is the following? Assets and Liabilities
Impact on valuation. Often:
Progressive
Low to high probability
Long term
Direct

Answer 32

Assets and Liabilities

Question 33

What channel of impact is the following?
Impact on (i) operational risks/cost of capital and (ii) one-time costs and contingent liabilities. Often:
Acute
Low probability
Near to medium term
Direct

Answer 33

Cost of Capital