Study Session 9: Equity Valuation: Valuation Concepts
I don’t have a clear understanding of levered and unlevered beta and it would be great if someone could help me.
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?
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 ?
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
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]
It is said that FCFF is better for valuating firms that are highly leveraged (compared to other methods). Why is this so?
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?
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?
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