# Study Session 14: Equity Analysis and Valuation

Dear All,

I have two questions about DCF. The first is that most of the time when you do a DCF, you start with EBIT*(1-tax) and then +depreciation-capex+/- change in working capital to arrive at free cash flow to firm. And the tax is certainly no the tax expense in income statement.

## Forms of EMH

In markets that are semi-strong-form efficient, which of the following statements is least likely correct?

A. A trader who uses technical analysis cannot outperform the market on a risk-adjusted basis.

B. Analysis based on financial statements will not lead to positive abnormal returns on average.

C. All publicly available information is fully reflected in current market prices.

## Return on Margin Position

When calculate investor’s return on the margin position, why commission fee should be included in total investment? This part of money won’t produce profit.

Thanks!

## Schwser Notes Errors

I would like anyone reading this to confirm whether these are errors in the Notes or not.

1. Record Date: Schweser Notes state that this is ‘the date on which all owners of shares will receive the dividend payment on their shares.’

## Price/Cash Flow Ratio

Is my CF computation below correct?

Net income per share=\$8  Price per share=\$200  Depreciation per share=\$4  Interest expense per share=\$3  Marginal tax rate=35%

CF = [8/(1 - 0.35) + 3 + 4] - (8/0.65 - 8) = \$15

Therefore, P/CF = 200/15 = 13.33

Is the only difference between herding & info.cascade, that with respect to info cascade, uninformed investors follow/mimic the the informed ones. While in herding, investors follow/mimic each other regardless whether the followers (leaders) are less informed (more informed) ??

## Applications of the DDM Model

Please assume a \$1 dividend and a net income range of \$(-10) ~ \$10.

(1) Can the dividend discount model be used when dividends are constant?

(2) Can the dividend discount model be used when dividends are constant while income varies but stays positive for more than a year (e.g. 2, 3, or 4 years)?

(3) Can the dividend discount model be used when dividends are constant while income varies but is negative for more than a year (e.g. 2, 3, or 4 years)?

## Dividends and Valuation Models

Please assume a \$1 dividend and a net income range of \$(-10) ~ \$10.

(1) Can the dividend discount model be used when dividends are constant?

(2) Can the dividend discount model be used when dividends are constant while income varies but stays positive for more than a year (e.g. 2, 3, or 4 years)?

(3) Can the dividend discount model be used when dividends are constant while income varies but is negative for more than a year (e.g. 2, 3, or 4 years)?

## Equity Valuation Methods and Inferences

If all the methods of equity valuation yield varying results,

(1) how must I come to a conclusion of what value an equity security holds?

(2) and on what basis would I have to prefer one valuation method over another?

## Treasury shares and retired shares

Hi,

I would like to ask a couple of questions below.

1) Are treasury shares included in market capitalization and EV calculations? Generally/in textbooks it should not be included. However, some analyst reports include while others don’t. Further, treasury shares should be excluded from the EPS calculations? Is this always the case, or does it depend on country? I know Japanese listed companies exclude treasury shares in their EPS calculations - would like to check for other countries.