probability of default and kd

Question 2

why is EV distribution important?

Answer 2

because it is the main determinant of bankruptcy risk, and thus consequential kd

Question 3

how can companies raise necessary liquidity?

Answer 3

1. selling assets
2. issuing stock
3. new debt

Question 4

what are the two definitions of bankruptcy whithin the italian system?

Answer 4

1. liquidity default: level of liquidity does not allow to pay interest or repay capital
2. value default: nominal value of financial debt > ev

in reality the 3rd condition (contractual condition) must hold as well

Question 5

what is the formula to analytically determine the risk premium?

Answer 5

[(Exp Loss + Exp BC)/Nom val Debt] * [risk free] / ([1+risk ree]^n - 1)

Question 6

what is the value of bankruptcy costs as a % of enterprise value?

Answer 6

between 12 and 20%

Question 7

what are the three factors differentiating debt?

Answer 7

1. duration
2. seniority
3. guarantees

Question 8

what are the steps to compute cost of equity?

Answer 8

1. choose parameters of the analysis (returns [w/m], time horizon, reference market index)
2. record the prices and transform them in returns
3. calculate the beta through regression
4. estimate MRP
5. estimate risk free rate
6. calculate Ke

Question 9

what are the pros and cons of historical and implicit/expected risk premium

Answer 9

historical
pros: objective
cons: might not reflect current mkt conditions

expected
pros: consistent with market conditions
cons: hard to determine, uncertain, subjective

Question 10

formula of adjusted beta and why do we use it

Answer 10

Badj = Braw*2/3 + 1/3

tendency of betas to go towards 1 in the long run

Question 11

what influences beta?

Answer 11

1. company ciclycality
2. operating leverage: %change in operating income / %change in revenue (how does risk from real markets transmit to operating income)
3. financial leverage

Question 12

how do you compute a company’s beta trough comparables

Answer 12

1. determine comparables
2. beta of comparables
3. delever betas
4. compute avg and med beta
   5.determine financial structure of comparables
5. relever beta with target financial structure

Question 13

delevered beta formula

Answer 13

unlB = levB/[1+(1-t)*D/E]

Question 14

what influences equity beta?

Answer 14

1. Bas - Bd
2. Leverage
3. tax rate

Question 15

what is the general range of debt beta?

Answer 15

0.2 - 0.25