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Study Session 9: Equity Valuation: Valuation Concepts

Unlevered Beta?

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

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]

FCFF for Leveraged Firms?

It is said that FCFF is better for valuating firms that are highly leveraged (compared to other methods). Why is this so?

Equity Risk Premium: Ibbotson Chen

Can anyone offer some insights on this?

Why does the Ibbotson Chen risk premium have the expected income component added seprately from the other components? 

The other components - expected inflation, gdp real growth and P/E growth are all multiplied geometrically, but expected income is not and instead is added. Why is that so?

Working Capital: Interest Payable and Notes Payable

Can someone please help to verify: 

Is interest payable considered a working capital item? Also is notes payable a working capital item?

I believe they aren’t working capital items as they relate to financing? Or is interest considered working capital while notes payable is not?  

Thanks!