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54 Cards in this Set

  • Front
  • Back

Porter's Five Forces

1- Threat of new entrants


2- Threat of substitutes


3- Bargaining power of buyers


4- Bargaining power of suppliers


5- Rivalry among existing competitors




Porter loves BECSS

Holding period return

r = ((P1-P0) +CF) / P0

Required return

minimum expected return an investor requires given an asset's characteristics

Internal Rate of Return (IRR)

equates discounted cash flow to current price

Equity Risk Premium

r = RFR + beta * ERP

Gordon Growth Model ERP

1-yr forecasted dividend yield on market index + consensus long-term earnings growth rate - long-term government bond yield

CAPM required equity return

r = RFR + beta * ERP

Multifactor Model equity return

RFR + risk prem 1 + risk prem 2 +...

Fama-French equity return

RFR + betamkt(Rmkt-RFR) + betasmb(Rsm-Rbig) + betahml(Rval-Rgro)

Pastor Stambaugh equity return

Add in liquidity factor to Fama-French

Macroeconomic multifactor equity return

uses factors associated with economic variables

Build up equity return

r = RF + ERP + size prem + specific-co prem

Blume adjustment to beta

adjusted beta = 2/3 * raw beta + 1/3 * 1

WACC

MVd/MVt *Kd*(1-T) + MVe/MVt*Ke



Discount FCFF at WACC


Discount FCFE at required return on equity

Strategy styles by industry

Adaptive - less predictable, less malleable


Classical - more predictable, less malleable


Shaping - less predictable, more malleable


Visionary - more predictable, more malleable

DDM Method useful

Dividend policy is related to earnings. Perspective of minority shareholder.

FCF method useful

Unstable dividend. FCF related to profitability. Controlling shareholder perspective.

RI method useful

Lack of dividend history and expected FCF is negative

GGM for dividends

V0 = D1/(r-g)



assumes perpetual dividend growth rate


appropriate for mature firms


very sensitive to changes in r and g


PV of Growth Opportunities

V0 = E1/r + PVGO

2 Stage Growth Model

Use GGM for terminal value after high growth period


Calculate high growth period dividends


Discount to time 0




(D0*(1+gs)^n*(1+gl)) / ((1+r)^n*(r-gl))

H model

V0 = ((D0*(1+glt))/(r-glt)) + ((D0*H*(gst-glt))/(r-gl)





Sustainable growth rate

retention rate * ROE




or




((net income - dividends)/net income) * (net income/sales) * (sales/total assets) * (total assets/stockholders equity)

required return w/ GGM model

r = D1/P0 + g

FCFF



FCFF = NI + Dep + Int *(1-t) - FCInv - WCInv


FCFF = EBITDA*(1-t) + Dep*t -FCInv - WCInv


FCFF = EBIT*(1-t) + Dep - FCInv - WCinv


FCFF = CFO + Int*(1-t) -FCInv

FCFE

FCFE = FCFF - Int*(1-t) + net borrowing


FCFE = NI + NCC - FCInv - WCInv + net borrowing


FCFE = CFO - FCInv + net borrowing


FCFE = NI - (1-DR)*(FCInv-Dep) - (1-DR)*WCInv

Net borrowing

Debt Ratio*(FCInv-Dep) + DR(WCInv)

Single Stage FCFF model

V0 = FCFF1/ (WACC-g)

Single Stage FCFE model

V0 = FCFE1/ (r-g)

2 Stage FCFF/FCFE model

Calculate FCF high growth

Use single stage model for terminal value


Discount with WACC for FCFF / r for FCFE


Justified leading P/E

(1-retention rate) / (r-g)

Justified trailing P/E

(1-retention rate)*(1+g) / (r-g)

Justified dividend yield

D0/P0 = (r-g) / (1+g)

normalization methods

Historical average EPS or Average ROE

Justified P/B ratio

(ROE - g) / (r-g)

Justified P/S ratio

(Profit Margin0*(1-retention rate)*(1+g)) / (r-g)

Dupont ROE Method

(net income/sales) * (sales/total assets) * (total assets/equity)

Residual Income

RI = (ROE - r) * Bt-1


RI - EPSt - (r*Bt-1)

Single stage RI model

V0 = (B0 + (ROE-r)*B0) / (r-g)

Multistage RI model

V0 = B0 + PV of interim high-growth RI + PV of continuing RI




PV of continuing RI using the single stage model

Economic Value Added

EVA = NOPAT - DollarWACC

NOPAT

Non operating profit after tax = EBIT * (1-t)

DLOC (discount for lack of control)

1 - (1/(1+control prem))

Total discount

1 - ((1-DLOC)*(1-DLOM))

DLOM (discount for lack of marketability)

Varies with:

Impending IPO (lowers DLOM)


Payment of dividends (lowers DLOM)


Earlier, higher payments (lowers DLOM)


Restrictions on selling stock (raises DLOM)


Greater pool of buyers (lowers DLOM)


Greater risk and value uncertainty (raises DLOM)


value of perpetual preferred shares

Vp = D/r

justified P/CF

V0 = FCFE0*(1+g)/(r-g)

PEG ratio

(P/E ratio) / g

weighted harmonic mean

1/ (sum wi/Xi)

Economic value added

EVA = NOPAT - $WACC

Net operating profit after tax

EBIT*(1-t)




(sales-COGS-SGA-dep)*(1-t)

$WACC

WACC*total capital

total capital

long term debt + stockholders equity




net working capital + net PPE

P/S

share price / revenue per share