Bloomberg Market Concepts Latest Update with Verified Solutions

Bloomberg Market Concepts Latest Update with Verified Solutions "AV will lull you into a sense of security" sensitivities: 1) revenues & costs may be in other currencies... buffeted by moves in FX market 2) many companies are impacted by commodities markets 3) moves in 10 yr gov bond yields change "risk-free" rates 4) share price itself can impact share price... a company w/ a rising share price can raise funds for growth more easily 11 industry groups communication services, energy, real estate, consumer discretionary, utilities, materials, information technology, consumer staples, industrials, health care, financials 1st steps to generating financial estimates for a company analyze historic performance using "actuals" (reported #s) 1) examine previous earnings statements 2) read transcripts of recent company-investor conference calls (esp management's Q&A w/ analysts) ^^ what guidance has company management provided re performance? 4 most influential central banks 1) federal reserve - US 2) bank of england - UK 3) ECB of europe - eurozone 4) bank of japan - japan 5 steps of absolute valuation 1) understand historic performance = estimate long-term future cash flows 2) estimate discount rate (WACC) = how much to discount those cash flows in order to derive today's value 3) take estimated future cash flows and discount by the WACC 4) deduct the firm's indebtedness and add firm's cash pile to derive market cap 5) divide estimated market cap by # of shares to give estimated fair share price absolute valuation estimate how much estimated future earnings are worth in today's money PROS: 1) precise = rests on detailed assumptions about future 2) anchored by earnings = derived by profit generated by company 3) disciplined thought process = must think through whole business model CONS: 1) demands clairvoyance 2) laborious = detailed model of company's revenue & costs 3) prone to subtle manipulation bc of assumptions (can provide a desired answer) AV step 1 need to project free cash flow ^^ cash that firm has available for both bond-holders & share-holders AV step 2 (investors assign a lower value to the future) US gov bond yields help set discount rate for equity investors ^^ but, unlike govs, companies don't have tax payers or money printing to fall back on... discount needs to be greater than gov bond yield rate discount rate for overall firm = blend of discount rates for equity & debt in proportion to relative split of equity & debt financing (remember unlisted debt instruments such as