Chp 13: Advance Valuation Techniques

Question 1

What is withholding tax?

Answer 1

A local tax on remittances paid to an overseas investor

Question 2

How do you use the M&M WACC formula if given a beta?

3 steps

Answer 2

1. Determine the equity beta of the company (use a comparitive company, if needed). Then ungear it using the formula provided.
2. Use the ungeared (asset) beta to calculate Ke ungeared using the CAPM formula.
3. Use the ungeared Ke to caluclate the WACC using M&M’s WACC formula

Question 3

How do you use the M&M WACC formula if no beta is given?

2 steps

Answer 3

1.Strip out the impact of it’s debt levels from it’s cost of equity to determine Keu (algebra needed on Keg equation)
2.Recalculate WACC with the new Keu

Question 4

How do you use the M&M Ke formula if valuing cash flows?

2 steps

Answer 4

1. Ungear the comparison companies beta/Ke/WACC
2. Regear using your companys gearing levels

Question 5

How do you adjust betas for use in the DVM model?

3 steps

Answer 5

1. Strip out the impact of debt from a comparitive companies beta/Ke
2. Regear the beta/Ke using your companies gearing levels to give the Keg
3. Use this Keg in the DVM model