FIN 312- exam 1 important

Question 1

value of equity =
(relative valuation)

Answer 1

expected dividends next year / (cost of equity - expected growth rate)

Question 2

FCFF formula

Answer 2

operating income after taxes
- net capital expenditure
- change in working capital

Question 3

FCFE formula

Answer 3

net income
- net capital expenditure
- change in working capital
+new debt issued

Question 4

value of firm =

Answer 4

Expected FCFF / (1+R) ^N

Question 5

value of equity =

Answer 5

Expected FCFE / (1+R) ^N

Question 6

reinvestment rate =
(for FCFF)

Answer 6

(net capital expenditure + change in non-cash working capital) / after-tax operating income

Question 7

retention rate = the percentage of earnings retained by a corporation = __
(for FCFE)

Answer 7

(1 - dividend payout rate)

Question 8

Return on equity =
(for FCFE)

Answer 8

net income / book value of equity

Question 9

THE NUMERATOR

Expected FCFE: depends on growth assumptions of net income :

Answer 9

retention rate x return on equity

Question 10

THE NUMERATOR

Expected FCFF: depend on growth assumptions of after-tax operating income :

Answer 10

reinvestment rate x return on capital

Question 11

after-tax return on capital =
(for FCFF)

Answer 11

after-tax operating income / (BV debt + BV equity - cash)

Question 12

THE DENOMINATOR: FCFF

What is R?

Answer 12

WACC

Question 13

THE DENOMINATOR: FCFE

What is R?

Answer 13

cost of equity estimated through CAPM

Question 14

you value an asset based on how similar asset are priced in the market

Answer 14

relative valuation

Question 15

A company reflects its fundamentals. Estimates of cash flows, growth, and risk

Answer 15

intrinsic valuation
(FCFF & FCFE)

Question 16

value of equity =
(relative valuation)

Answer 16

expected dividends next year / (cost of equity - expected growth rate)

Question 17

Answer 17

PE
- dividing both sides by next income

Question 18

Answer 18

PBV
- dividing both sides by the book value of equity

Question 19

Fundamental determinants:

Expected growth up, higher PE Payout up, higher PBV

Lower cost of equity (risk), higher ____

Answer 19

PBV

Question 20

Fundamental determinants:

Expected growth up, higher PBV Payout up, higher PBV

Lower cost of equity (risk), higher PBV, Higher ____, higher ___

Answer 20

ROE; PBV

Question 21

EV is enterprise value =

Answer 21

expected FCFF next year / (cost of capital - expected growth rate)

Question 22

EV/EBITDA- Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA)

Fundamental determinants:

____ reinvestment rate, higher EV/EBITDA
____ cost of equity (risk), higher EV/EBITDA
____ ROIC, higher EV/EBITDA
____ tax rate, higher EV/EBITDA

Answer 22

Lower; Lower; Higher; Lower

Question 23

DCF =

Answer 23

CFt / (1+r)^t

Question 24

WACC =

Answer 24

Ke * (E / E+D) + Kd * (D / E+D) * (1-t)

Question 25

CAPM =

Answer 25

Ke = Rf + Beta * MRP

Question 26

Reinvestment rate =

Answer 26

Question 27

Terminal value in year n =

Answer 27

FCFn * (1+g) / (r - g)