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Study Session 9: Equity Valuation: Valuation Concepts

idosyncratic risk affect on market risk

For a thinly traded stock, how could the idiosyncratic (diversifiable risk) overwhelm the market risk & thus making  beta a poor predictor of future stock returns for company xyz?

NI includes preferred dividend?

Hi 

In a Fcff calculation question, if the NI is given, do we assume it is NI after preferred dividend or before?

Do we add back Preferred dividend to NI to get FCFF?

Thanks 

Equity value

Do we have to deduct all interest bearing Liabilities from firm value to derive equity value?

Tx

Required Rate of Return for different countries - Equity topic test, Pacific Wind case

In CFAI Equity topic test, Pacific Wind case, answer for Q5 says:

Differences in GDP growth rates between countries may exist but this is not an important consideration specific to estimating required rate of return between the two countries. 

I understand why other factors such as factors premium and FX rate forecasts are essential, but why is GDP growth not as important? 

Thanks!

WACC vs. Required Return on Equity

I’m sure this questions has been asked so many times, but when do we use WACC and when use Required Return on Equity? I’m asking the questions under the context of Equity Valuation. 

I assume WACC is used to valuate the entire company (debt + equity), and Required Return on Equity for company’s equities only. But say when we’re calculating H model, PVGO, residual income etc., this could be a bit confusing…

Thanks.

Equity Risk Premium

Hi guys

In CFAI Equity Topic Test - Rivera, Question 3, why is Caveat 2 correct? Equity Risk Premium for based on long term gvt bonds is smaller than short term gvt bonds, that should be wrong no? Because long term bonds needs to account for illiquidity and uncertainly? 

Thanks.

Calculating cost of equity by CAPM

Hello guys,

Which risk-free rate should we use while calculating the cost of equity by CAPM?- The short-term govt. bond yield? or the long term govt. bond yield? I am doing the Topic Tests on equity of the CFA website and I have encountered two sets where two different yields (short and long) were used. Unfortunately they don’t explain in the answers why they used short term in one and long term in the other.

Could somebody please clarify if the CFA books mention somewhere which is to be used and when?

Current Portion Of Long-Term Debt in FCFF and FCFE

Hello all 

i am wondering what would be the impact of 

Current Portion Of Long-Term Debt on FCFF and FCFE? 

I believe it should be ignored because it is just an allocation, not an actual outflow. Please advise.