L3 - Bond & Equity Valuation Flashcards
(16 cards)
What are the key determinants of intrinsic value for a company
- Free cash flow
- Market interest rates
- Firms business risk
- MArket risk aversion
- Firm’s debt/ equity mix
- Cost of debt
- Cost of equity
- WACC
How is the value of financial securities determined?
PV of future expected cash flows
What is YTM on a bond?
The required market interest rate on a bond, or the rate of return earned on a bond held to maturity
What is the relationship between coupon rate, YTM, and bond price?
Coupon Rate = YTM, then Price = Par
Coupon Rate > YTM, then Price > Par
Coupon Rate < YTM, then Price < Par
Write the formula to calculate bond value
Value = C / (1+r)^T + F / (1+r)^T
Where C is coupon
r is discount rate
F is faace value
How is price risk defined in the context of bonds?
Change in price due to changes in interest rates
Which bonds have more price risk? Long or Short term bonds?
Long term
Which bonds have more price risk? Low or High Coupon?
Low Coupon rate bonds
How is reinvestment risk defined
Uncertainty concerning rates at which cash flows can be reinvested
Which bonds have more reinvestment risk? Long or Short Term bonds?
Short term
Which bonds have more reinvestment rate risk? High Coupon or Low Coupon?
High Coupon Rate
How to calculate a current yield?
Current Yield = Annual coupon pymnt / current price
What are zero coupon bonds?
Bonds which make no periodic interest payments (coupon rate = 0%)
What is the relationship between promised yield (YTM) and expected return for corporate bonds?
The YTM may be higher than the expected return due to the added default risk
How do you value a zero-growth stock?
PV of a perpetuity
What is the growth rate (g) equal to?
g = retention ratio x return on retained earnings OR g = (1-Payout ratio) x return on retained earnings
