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Study Session 14: Equity Analysis and Valuation

Equity infusion and FCFE

Hey everyone!

Could you be so kind to explain me 1 thing.

Why doesn’t equity infusion affect FCFE?

Imagine a company with Cash 100 and Equity 100. Calculating EV gives us 0, but further adjustments for cash would lead to Equity value = 100 (EV +Net debt = 0 + 100). But in case we calculate FCFE and determine equity value through FCFE discounting would result in equity value = 0. 

So why doesn’t we take into account equity infusion for FCFE calculation?

Thanks in advance!

Intrinsic value of a stock

The GG corporation pays no cash dividends currently and is not expected to for the next 4 years. Its latest EPS was 5$, all of which was reinvested in the company. The firm’s expected ROE for the next 4 years is 20% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm’s ROE on new investments is expected to fall to 15%per year. GG market capitalization rate is 15% per year. 

two questions about DCF

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

Herding vs info. cascade

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)?