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Study Session 9: Equity Valuation: Valuation Concepts

Inflation risk

Why nearly all stocks have negative exposure to unexpected change in the inflation rate, as their returns decline with positive surprises in inflation?

Return Concepts

if the historical data displays survivorship bias, the historical risk premium estimate should be adjusted downward, not upward…

Can somebody explain the logic here? I thought survivorship bias means only the good performing funds are taken into account hence the risk premium is too low (compared to what it would be if all funds were considered) as it only considers the good performing funds… so to adjust the risk premium should be adjusted higher..

high risk = high risk premium… please correct me if i am wrong.

equity valuation

can i use different risk free rate for every year in my equity valuation ???

Like for Y1 Rf=4% Y2 Rf=3% and so on …….

Calculating EV/EBITDA

Need a little help on this EV/EBITDA calculation for Chesapeake Energy.  Not sure if I’m doing this right. 

Using yesterday’s closing price and current outstanding shares, I got a diluted equity value of $6.132B. Then, I used the most recent 10-Q to calculate the EV. Does this look right? I appreciate any help.

Diluted Equity Value:                 6,131,864,900

Less Cash & Cash Equiv:               (4,000,000)

Less: Net Value of Hedges:            121,000,000

Plus: Debt                                  9,678,000,000

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?