Study Session 9: Equity Valuation: Valuation Concepts
How do you quantify the cost of equity?
The dividend is a tangible cost that makes up a small portion of the cost of equity and the cost of debt can be directly quantified by the interest paid on debt. But how do you quantify the cost of equity?
If you take a look at the formula for computing FCFF from EBITDA,
FCFF = EBITDA (1-tax rate) + Depreciation (tax rate) - FCInv - WCInv
you would notice we add back the depreciation tax shield because that tax saving represents cash available to the company’s investors.
Why then, don’t we also add back the interest tax shield in this formula?
I know this is something we all have seen at least 5 times in our undergrad courses, but does anyone else think it’s difficult to quantify/categorize one detail in a vignette into one of these forces? Anyone got any tips or tricks for this? I just feel this would be such a dumb question to get wrong when my margin for error is already low.
One thing minor I continuously seem to find myself struggling with is how to functionally convert D/E.
For instance, I was just working through an equity problem requiring to un-lever then re-lever beta. I knew the formula for both and was ready to go.
They presented D/E in two ways:
Target company: 40% Debt-to-total-capital
Actual company: 75% Debt-to-equity
I tried ten different inputs and couldn’t get the answer right.
Came across this solution for a share valuation using a DDM model. It seems that they disregarding the cash flows in the first 7 years, and only taking the PV of terminal value as the share price….why are we ignoring the initial cash flows? Am I missing something here?
I understand the formulas are different, but let’s say a company has no debt, would the required return of equity be the same as the WACC? Since required return of equity would essentially be the cost of capital for the company, would the two be the same conceptually?
1. Is there any difference between FC Inv = CAPEX ?
2. Is CAPEX = Ending Fixed assets - Beginning Fixed Assets - Depreciation?
DLOC = 1/ (1-Control premium)
Easy formula to remember. However, I’m just curious at why not DLOC = 1 - Control premium? (Discount + Premium = 1)???
Can someone explain in easy way please?
How should I value the following preferred stock in my EV calculation?
Series J 8.38% cumulative redeemable preferred stock, 1,000,000 shares authorized, 796,948 issued and outstanding with a liquidation value of $39,847.
The balance sheet shows $42,748 against the above entry. I am not sure if I should use the liquidation value, the balance sheet number or some other value in my Enterprise Value calculation for this company.
Hi all, hope everyone’s studying going as well as it can.
How do we know whether to include minority interest in calculating book value (and BVPS)? On page 436 of the CFA Equity textbook (reading 31), the BB example takes TD’s total equity and only subtracts the book value of preferred shares, leaving in the non-controlling interest in subsidiaries.
However, in one of the TTs (Byran Lee Case Scenario), we’re given the following:
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