# Study Session 9: Equity Valuation: Valuation Concepts

## Required Returns

What is Growth biased and Value biased in Equity Valuation.

## 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…)

thanks!

## 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 ?

thanks

## 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

## 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

## Equity Risk Premium vs Market Risk Premiun

From Equity Book, the following formulas can be cited:

(i) Required return on equity = Current expected risk-free return + Equity risk premium

(ii) Required return on share i=Current expected risk-free return +βi(Equity risk premium)

Now please tell me that the subtle difference in the above formulas. If (i) and (ii) is equal, then βi(Equity risk premium)= Equity risk premium

From my understanding goes:

**Equity risk premium= βi (Market Return- Risk free Return)** [(Market Return- Risk free Return)= Market Risk Premiun]

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