# Study Session 11: Equity Investments: Free Cash Flow and Other Valuation Models

## R38 Credit Analysis Models - EOC 18

Hi!

I can’t understand the answer. Why the value of the Debt is \$700.000? Why not \$500.000.

## How are deferred tax assets and liabilities and deferred income treated in net working capital?

Hi Does anyone know if following should be included in net working capital calculation for FCFF?

1) Deferred Tax and liabilities

2) other investments included in Current assets below cash & cash equivalents

3) Deferred income

## Riding the yield curve - does it always have to slope up?

Do expected spot rates ALWAYS have to be BELOW current forward rates? Can they be above?

What i’m asking is.. when riding the yield curve = does it only refer to going LONG on a bond? You cannot go short in “riding the yield curve” ?

## Mendosa Case - Question about residual income calculation

Hi guys, I have a question with Mendosa case - Question 6.

The answer said “residual income in year 5 = 5.4*1.155”.

I don’t understand why we need to multiply 1.155, rather than 1.154?

The residual income in Year 1 = Book value of equity in year 0 * (ROE - r)

Thank you.

## R30 - Free Cash Flow Valuation - EOC Q6.

1. Quinton Johnston is evaluating NYL Manufacturing Company, Ltd. In 2017, when Johnston is performing his analysis, the company is unprofitable. Furthermore, NYL pays no dividends on its common shares. Johnston decides to value NYL Manufacturing by using his forecasts of FCFE. Johnston gathers the following facts and assumptions:

• The company has 17.0 billion shares outstanding.

• Sales will be \$5.5 billion in 2018, increasing at 28 percent annually for the next four years (through 2022).

## After tax interest addition to FCFF

While calculating FCFF we add back after tax interest to it ( + int(1-t) ). By definition FCFF is the cash available to providers of the capital i.e equity holders and bond holders. So, shouldn’t we add back the whole interest to FCFF? Why don’t we include the benefit of tax saving due to interest in FCFF calculation?

(Eg: Let’s say there’s an owner, an equity holder, a bond holder, and a tax official standing side by side. The owner now distributes money to each of these in the following manner.

EBIT =100 ,

interest = 10 ( to bondholder)

## Reading 32 - CFAI EOC question #33

I have a question regarding the calculation/timing of the terminal value. I searched through old AnalystForum threads, but could not find a concise answer.

## Multistage residual income - CFAI vs. Schweser

For multistage residual income valuation and an ROE that declines to a long-run level, it seems that the CFAI and Schweser notes are giving inconsistent formulas.

## Derivation of the formula for DLOC

Can anyone help derive the formula for DLOC

DLOC = 1 - (1/(1+control premium))

Thanks!

## Clean Surplus Violation for Residual Income Valuation

Does anyone have an intuitive explanation of why clean surplus has to hold for residual income valuation? What happens conceptually if the clean surplus does not hold in terms of valuation? Thanks!