Shareholder's equity
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is the residual
the value of the business available to the owners (shareholders) after debts
have been paid off
How would you calculate beta for a company?
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, Calculating raw betas from historical returns and even projected betas is
an imprecise measurement of future beta because of estimation errors (i.e.
standard errors create a large potential range for beta). As a result, it is
recommended that we use an industry beta. Of course, since the betas of
comparable companies are distorted because of different rates of
leverage, we should unlever the betas of these comparable companies as
such:
β Unlevered = β(Levered) / [1+ (Debt/Equity) (1-T)]
Then, once an average unlevered beta is calculated, relever this beta at the
target company's capital structure:
β Levered = β(Unlevered) x [1+(Debt/Equity) (1-T)]
What is typically higher - the cost of debt or the cost of equity?
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The cost of equity is higher than the cost of debt because the cost
associated with borrowing debt (interest expense) is tax deductible,
creating a tax shield. Additionally, the cost of equity is typically higher
because unlike lenders, equity investors are not guaranteed fixed
payments, and are last in line at liquidation.
Assets
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resources a company uses to operate its business
includes cash, A/R, PP&E
, What is the appropriate numerator for a revenue multiple?
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The answer is enterprise value. The question tests whether you understand
the difference between equity value and enterprise value and their
relevance to multiples. Equity value = Enterprise value - Net Debt (where
net debt = gross debt and debt equivalents - excess cash).
EBIT, EBITDA, unlevered cash flow, and revenue multiples all have
enterprise value as the numerator because the denominator is an unlevered
(pre-debt) measure of profitability. Conversely, EPS, after-tax cash flows,
and book value of equity all have equity value as the numerator because
the denominator is levered - or post-debt.
Cash from financing activities
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cash related to capital raising and payment of dividends
if the company issues more preferred stock, we will see such an increase in
cash in this section
if the company pays out dividends, we will see a cash outflow
for stable, mature plain vanilla companies, there is not a preference for
positive or negative cash flow in this section
How do you calculate unlevered free cash flows for DCF analysis?
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Give this one a try later!
is the residual
the value of the business available to the owners (shareholders) after debts
have been paid off
How would you calculate beta for a company?
Give this one a try later!
, Calculating raw betas from historical returns and even projected betas is
an imprecise measurement of future beta because of estimation errors (i.e.
standard errors create a large potential range for beta). As a result, it is
recommended that we use an industry beta. Of course, since the betas of
comparable companies are distorted because of different rates of
leverage, we should unlever the betas of these comparable companies as
such:
β Unlevered = β(Levered) / [1+ (Debt/Equity) (1-T)]
Then, once an average unlevered beta is calculated, relever this beta at the
target company's capital structure:
β Levered = β(Unlevered) x [1+(Debt/Equity) (1-T)]
What is typically higher - the cost of debt or the cost of equity?
Give this one a try later!
The cost of equity is higher than the cost of debt because the cost
associated with borrowing debt (interest expense) is tax deductible,
creating a tax shield. Additionally, the cost of equity is typically higher
because unlike lenders, equity investors are not guaranteed fixed
payments, and are last in line at liquidation.
Assets
Give this one a try later!
resources a company uses to operate its business
includes cash, A/R, PP&E
, What is the appropriate numerator for a revenue multiple?
Give this one a try later!
The answer is enterprise value. The question tests whether you understand
the difference between equity value and enterprise value and their
relevance to multiples. Equity value = Enterprise value - Net Debt (where
net debt = gross debt and debt equivalents - excess cash).
EBIT, EBITDA, unlevered cash flow, and revenue multiples all have
enterprise value as the numerator because the denominator is an unlevered
(pre-debt) measure of profitability. Conversely, EPS, after-tax cash flows,
and book value of equity all have equity value as the numerator because
the denominator is levered - or post-debt.
Cash from financing activities
Give this one a try later!
cash related to capital raising and payment of dividends
if the company issues more preferred stock, we will see such an increase in
cash in this section
if the company pays out dividends, we will see a cash outflow
for stable, mature plain vanilla companies, there is not a preference for
positive or negative cash flow in this section
How do you calculate unlevered free cash flows for DCF analysis?
Give this one a try later!
