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Study Session 9: Equity Valuation: Valuation Concepts

Comparing PEs across countries, across sectors

I work with someone who is adamant on comparing the PE values of different countries benchmark indexes, and using that to say that one country’s equity market is undervalued etc.  [The only context i am used to using PE is stock vs its sector, and even then it can be hard to define a comparator group.]

This seems like total garbage to me, even the data is distorted by negative earnings, but what are the key reasons why this analysis is meaningless in practice?



Explain the implications of Fama French models’s  factors - size, Value and market factors in determining the characteristics of a company

bond yield plus model

Is it true that the bond yield plus model DOESN’T factor in changes in inflation risk while the multi-factor model DOES? (I’m confused because I would think changes in expected inflation WOULD change any given firm’s LT bond yield and therefore would change the bond yield plus model’s required calc…)


Highest Value/Valuation Method

Hello guys,

Had an interview the other day and the question of which valuation method produces the highest value came up. My answer was precedent transactions>comparables due to premiums etc. Then I was specifically asked about DCF and I said that it depends on your inputs and estimations but usually it gives a higher price than the other two. The interviewer didn’t seem to like my answer and kept asking for the exact reason which I was unable to provide. After the interview I had a look online with no luck so I am here asking for your guidance! What do you think?

Unlevered Beta?

I don’t have a clear understanding of levered and unlevered beta and it would be great if someone could help me.

Correct me if I am wrong, when we unlever beta, we remove the debt component. The Schweser book says “The unlevering process isolates systematic risk”. But, beta already represents the systematic risk, so why do we have to unlever it in the first place?

Ibotsen chen model

If ‘the markets are overvalued’, why would that lead to a lower equity risk premium? I would think the risk premium would be higher if the markets were overvalued?

I came across this in a problem- we are asked to update certain economic parameters for a hypothetical firm due to a recent economic slowdown. Wouldn’t we want a higher equity risk premium and therefore higher required return and lower prices in our models? 

FCFF from NI and CFO

Hi everyone, 

I see everywhere these two formulas : 

FCFF = NI + NCC + Int * ( 1 – T ) – Inv LT – Inv WC

FCFF = CFO + Int * ( 1 – T ) – Inv LT

According to these formulas, CFO = NI + NCC - Inv WC

But if there is a extra gain on sales from land in NI, then CFO = NI - gain on sales + NCC - Inv WC

So to their formula is WRONG, right ? 


FCFF : FCInv versus Depreciation

Hi everyone,

I would like to know why we seem to count two times the depreciation in the FCFF equation from EBIT and EBITDA.

As an example,

FCFF = EBITDA * (1- T) + Depreciation * T - WCInc - FCInv

With FCInv = Change in gross PPE - Depreciation

So Depreciation is counted in double, in EBITDA and add in FCInv… no ?

Thank you very much

Equity risk premium - which Risk free to use?

Is the general use to use long term RF for CAPM, Macroeconomic models, build up but …

short term RF for Fama French and APT portfolio models?

 Kaplan notes are not explicit on this .   Thanks in advance