Week 5

Question 1

Two faces of debt

Answer 1

Risk and tax shield

Question 2

Bera unleaveared

Answer 2

Measured only the business risk

Question 3

THE DCF METHODOLOGY

Answer 3

ACCORDIING TO THE PRINCIPLES OF FINANCIAL THEORY, THIS METHODOLOGY DETERMINES THE VALUE OF A FIRM ON THE BASIS OF
THREE PARAMETERS:
THE GENERATION OF (FREE) CASH FLOW
THE TIME DISTRIBUTION OF THESE CASH FLOWS
THE RISK ASSOCIATED TO THEM

Question 4

‘Asset Side’ Approach

Answer 4

According to this approach we estimate the Market Value (EV) of Net Invested Capital (NIC)
The economic variable assumed for estimation is
Operating Profit net of taxes: [EBIT*(1-Tc)] = NOPAT
MARKET VALUE OF SHAREHOLDERS CAPITAL : E = EV - NFP

Question 5

‘Equity Side’ Approach

Answer 5

According to this approach we estimate the Market Value (E) of shareholders capital
The economic variable assumed for estimation is Net
Profit. From Net profit we calculate Cash Flow to equity;
Discount rate
MARKET VALUE OF SHAREHOLDERS CAPITAL: E

Question 6

Net Invested Capital (NIC)

Answer 6

Net Fixed Assets + Net Working Capital

Question 7

THE FRE CAS FLOW TO EQUITY

Answer 7

IS FOR STOCKHOLDERS ONLY

Question 8

THE FREE OPERATING CASH FLOW

Answer 8

FOR ALL FINANCIAL STAKEHOLDERS STOCKHOLDERS AND DEBTHOLDERS).

Question 9

CASH FLOW CALCULATION

Answer 9

FUTURE CASH FLOWS THAT ARE ASSUMED IN THE DCF APPROACH COME FROM THE FIRM’S BUSINESS PLAN
THE STARTING POINT IS THE EXAM OF THE FIRM’S PAST FINANCIAL REPORTS (HISTORICAL ANALYSIS)

Question 10

TIME AND THE CALCULATION APPROACH

Answer 10

 THE MOST WIDELY USED APPROACH IS THE TWO STAGES MODEL, EITHER FOR THE DCF AND THE INCOME MODEL (BASING THE VALUATION ON INCOME)
 THE ASSUMPTION IS THE CONVERGENCE OF THE GROWTH RATE OF THE FIRM TOWARDS A LONG TERM GROWTH RATE (g), COHERENT ITH THE LONG TERM GROWTH RATE OF THE ECONOMICS SYSTEM