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Study Session 10: Equity Valuation: Industry and Company Analysis and Discounted Dividend Valuation

International Considerations and Real Required Return

In the curriculum,  it says that when we evaluate non domestic stocks, often we need to make industry, size and leverage adjustments to get the real required return. However, what if we have the required return and just add the country risk premium. Would that be considered ok too hypothetically? 

In the exam, would the signs for each adjustment be given? I am trying to understand the logic.

For example if we invest in a small and leveraged firm, does it mean that we need to add for both of these two adjustments to get the real return? 

Is ROE same as ROR?

CFA Curriculum 2020 Equity EOC  Q no. 44 - Pg 263

In the solutions, ROE is simply taken as the Required rate of return in the formula of Sustainable Growth Rate to calculate sustainable Dividend Payout Ratio. 
I know ROE and ROR are different. So what can possibly be the explaination for using it interchangably here?

Leading vs. trailing P/E

Does anyone have an easy way to remember that it’s the trailing P/E that has (1+g) in the numerator as opposed to the leading P/E?  I keep forgetting it.

Valuation - When you discount the Terminal Value and when not too

I am having trouble determining when to discount the terminal value by the required return and when not to. 

Am I missing the part of the question where it differentiates the time differences? why accept a value one way and not the other?

This might be obvious to others but I am struggling with the difference, would appreciate some help.

Discounted Dividend Valuation

Extract from a vignette on the official CFA website -

‘Still concerned with the estimate of growth after 2019, Stack asks Armishaw what the present value of growth opportunities (PVGO) will be in 2019 when the perpetual growth period begins.’

‘Present Value in 2019’

When I see a statement such as this one, am I being asked to calculate the value at the beginning of 2019, or at the end of 2019?

Calculation of Dividend

Hi, I keep getting confused with dividend calculations. So if a company will start paying dividend after 4 years and the first dividend is $1 and growth rate is 5%. r is 7%. What is the value? Shouldn’t 1 x (1+5%)/ (7% - 5%)(1+7%)4 be equal to 1/ (7% - 5%)(1 + 7%)3.

How do I know when to use the former and when to use the latter?

Adjusted EBITDA used in practice

Hi guys,

Question on adjusted EBITDA. 

So, from my understanding, when doing trade comparatives in valuation, adjusted ebitda/ebit is commonly used because it is a good proxy for cashflow and it adjusts for non-recurring items. 

P/E and justified P/E (Trailing)

From CFAI book:

[question removed by moderator]

Why are these two number different wouldn’t the direct calculation of  P0 / E0  be the same as (1+g)*(1-d)/(r-g)

Net Proceeds Calculation

Q) The Stockholders in a company owns 500 shares. The New Public Issue is there with 600 Shares. Each share price will be traded at $20 with a 4% spread. The cost will be $400000. Calculate the net Proceeds?

1.  $11,120

2.  $ 19,200

3.  $ 11,600

4.  $ 15,600

Can anybody help me on this problem?

Risk premium and bond yield

There’s this question on the online question bank about determining the risk premium for a stock using the GGM, with a 1.5% adjustment for company size. This company’s revenues and earnings are cyclical in terms of both the business cycle as well as seasonality. After calculating the required return for the company’s equity, to get to the risk premium I subtracted the short-term government bond yield (since last time I subtracted the long-term yield and got it wrong, I was at that time told that the short-term is appropriate since the company is cyclical), wrong again….