CMA Part 2 – Strategic Financial Management
Review– Expert Strategies| Accurate Verified
Questions &Answer
Financial break-even
Solution
Financial break even
NPV solved=0, OCF* for NPV=0
Q=(FC+OCF*)/ (P-v)
v=variable cost per unit
General Break-Even
Solution
Q=(FC+OCF) /(P-v)
Constant Growth Model (infinite)
Solution
a widely cited dividend valuation approach that assumes that
dividends will grow at a constant rate, but a rate that is less than
the required return
Constant Growth Model (finite)
Solution
Should include terminal value (what you sell it for) @ end
To do so you calculate the non-constant growth rate until horizon
date T...then calculate the terminal value as you would in an
infinite CGM w/ denominator raised to power T
expected rate of return (constant growth model)
Solution
The rate of return expected to be realized from an investment; the
weighted average of the probability distribution of possible results
capital gains yield
Solution
the dividend growth rate, or the rate at which the value of an
investment grows
Dividend Yield
,Solution
a stock's expected cash dividend divided by its current price
terminal value (Horizon Value)
Solution
the sale price at the end of the expected holding period
Perpetual Growth Method
Solution
dividing the last cash flow forecast by the difference between the
discount rate and terminal growth rate. The terminal value
calculation estimates the value of the company after the forecast
period.
(FCF * (1 + g)) / (d - g)
Free Cash Flow Valuation Model
Solution
A model that determines the value of an entire company as the
present value of its expected free cash flows discounted at the
firm's weighted average cost of capital, which is its expected
average future cost of funds over the long run.
FCF Constant Growth Model
Solution
A variation of the constant growth model
Market Multiple Analysis
Solution
A method of valuing a target company that applies a market
determined multiple to net income, earnings per share, sales, book
value, and so forth.
Preferred Stock Dividends
Solution
Fixed. Have priority over common stock dividends.
convertible preferred stock
Solution
Preferred stock with an option to exchange it for common stock at
a specified rate.
cumulative preferred stock
,Solution
Preferred stock on which undeclared dividends accumulate until
paid; common stockholders cannot receive dividends until
cumulative dividends are paid.
Free Cash Flow
Solution
net operating profit after taxes (NOPAT), add in depreciation
expense, then subtract money set aside for capital expenditures
and any need for increasing working capital
Capital Asset Pricing Model (CAPM)
Solution
a model that relates the required rate of return on a security to its
systematic risk as measured by beta
call option
Solution
the option to buy shares of stock at a specified time in the future
put option
Solution
the option to sell shares of stock at a specified time in the future
Cash Conversion Cycle (CCC)
Solution
the length of time funds are tied up in working capital, or the
length of time between paying for working capital and collecting
cash from the sale of the working capital
Return on Equity (ROE)
Solution
Net Income/Total Equity
Weighted Average Cost of Capital (WACC)
Solution
the weighted average of the cost of equity and the aftertax cost of
debt
Why is Equity more expensive than Debt?
Solution
Because it comes w/ higher expected rate of return due to higher
risk (residual claimant of the firm's cash flows)
, Levered Beta
Solution
The unlevered beta adjusted for financial risk due to leverage
Unlevered Beta
Solution
The firm's beta coefficient if it has no debt
working capital requirement
Solution
(Current assets - inventory) - current liabilities
Net Present Value (NPV)
Solution
the sum of the present values of expected future cash flows from
an investment, minus the cost of that investment
Internal Rate of Return (IRR)
Solution
the discount rate that makes the NPV of an investment zero
How do we value a share of stock?
Solution
Collapse future earnings down to present value equivalents
Disintermediation
Solution
the long-term trend of moving away from banks to markets for
capital requirements
Risk-free rate
Solution
No such thing...but many use 10 year Treasury bonds as a proxy
for the risk-free rate
Flotation Costs
Solution
the transaction cost incurred when a firm raises funds by issuing a
particular type of security
Flotation Cost Adjustment
Solution
Review– Expert Strategies| Accurate Verified
Questions &Answer
Financial break-even
Solution
Financial break even
NPV solved=0, OCF* for NPV=0
Q=(FC+OCF*)/ (P-v)
v=variable cost per unit
General Break-Even
Solution
Q=(FC+OCF) /(P-v)
Constant Growth Model (infinite)
Solution
a widely cited dividend valuation approach that assumes that
dividends will grow at a constant rate, but a rate that is less than
the required return
Constant Growth Model (finite)
Solution
Should include terminal value (what you sell it for) @ end
To do so you calculate the non-constant growth rate until horizon
date T...then calculate the terminal value as you would in an
infinite CGM w/ denominator raised to power T
expected rate of return (constant growth model)
Solution
The rate of return expected to be realized from an investment; the
weighted average of the probability distribution of possible results
capital gains yield
Solution
the dividend growth rate, or the rate at which the value of an
investment grows
Dividend Yield
,Solution
a stock's expected cash dividend divided by its current price
terminal value (Horizon Value)
Solution
the sale price at the end of the expected holding period
Perpetual Growth Method
Solution
dividing the last cash flow forecast by the difference between the
discount rate and terminal growth rate. The terminal value
calculation estimates the value of the company after the forecast
period.
(FCF * (1 + g)) / (d - g)
Free Cash Flow Valuation Model
Solution
A model that determines the value of an entire company as the
present value of its expected free cash flows discounted at the
firm's weighted average cost of capital, which is its expected
average future cost of funds over the long run.
FCF Constant Growth Model
Solution
A variation of the constant growth model
Market Multiple Analysis
Solution
A method of valuing a target company that applies a market
determined multiple to net income, earnings per share, sales, book
value, and so forth.
Preferred Stock Dividends
Solution
Fixed. Have priority over common stock dividends.
convertible preferred stock
Solution
Preferred stock with an option to exchange it for common stock at
a specified rate.
cumulative preferred stock
,Solution
Preferred stock on which undeclared dividends accumulate until
paid; common stockholders cannot receive dividends until
cumulative dividends are paid.
Free Cash Flow
Solution
net operating profit after taxes (NOPAT), add in depreciation
expense, then subtract money set aside for capital expenditures
and any need for increasing working capital
Capital Asset Pricing Model (CAPM)
Solution
a model that relates the required rate of return on a security to its
systematic risk as measured by beta
call option
Solution
the option to buy shares of stock at a specified time in the future
put option
Solution
the option to sell shares of stock at a specified time in the future
Cash Conversion Cycle (CCC)
Solution
the length of time funds are tied up in working capital, or the
length of time between paying for working capital and collecting
cash from the sale of the working capital
Return on Equity (ROE)
Solution
Net Income/Total Equity
Weighted Average Cost of Capital (WACC)
Solution
the weighted average of the cost of equity and the aftertax cost of
debt
Why is Equity more expensive than Debt?
Solution
Because it comes w/ higher expected rate of return due to higher
risk (residual claimant of the firm's cash flows)
, Levered Beta
Solution
The unlevered beta adjusted for financial risk due to leverage
Unlevered Beta
Solution
The firm's beta coefficient if it has no debt
working capital requirement
Solution
(Current assets - inventory) - current liabilities
Net Present Value (NPV)
Solution
the sum of the present values of expected future cash flows from
an investment, minus the cost of that investment
Internal Rate of Return (IRR)
Solution
the discount rate that makes the NPV of an investment zero
How do we value a share of stock?
Solution
Collapse future earnings down to present value equivalents
Disintermediation
Solution
the long-term trend of moving away from banks to markets for
capital requirements
Risk-free rate
Solution
No such thing...but many use 10 year Treasury bonds as a proxy
for the risk-free rate
Flotation Costs
Solution
the transaction cost incurred when a firm raises funds by issuing a
particular type of security
Flotation Cost Adjustment
Solution
