QUESTION SHEET 9: REVISION
1. (Fall 1998) You want to estimate the country risk premium (over and above the
base equity premium) to charge for a company listed in Indonesia, and have been
supplied with the following information:
Indonesia is rated BB by S
QUESTION SHEET 8
1. Estimate the Modified duration of a government bond with a coupon rate of 10% and a 5year maturity, if the yield to maturity on the bond is 8%. You can assume that the coupons are
paid annually.
2. Estimate the Modified duration of a g
QUESTION SHEET 7
1. The following questions all relate to earnings or book value multiples.
a. When interest rates decrease, the price earnings ratio for a firm
will
become more sensitive to changes in the expected growth rate in earnings
will
become less
QUESTION SHEET 6
1. You have been given a list of software firms and have been asked to analyze them based
upon the PEG ratio, taking into account any fundamentals that might cause PEG ratios to
vary across firms.
Company
PEG Ratio
Beta
ROE
AC Software
0.
QUESTION SHEET 5:
1. AlumCare Inc, which maintains and runs health maintenance organizations, has a
price/book value ratio of 4. It merges with HealthSoft Inc, a corporation that owns
and runs hospitals, and has a price/book value ratio of 2. Assuming tha
QUESTION SHEET 4
1. You have been asked to estimate the cost of equity for ABC Ltd., a firm with
operations in three different businesses Banking, Steel and Retailing. You have
collected information on the firms operations and of comparable firms in each
QUESTION SHEET 3
1. You have been asked to estimate the cost of equity for Holton Holdings, a firm with
operations in three different businesses retailing, hotels and travel. You have
collected information on the firms operations and of comparable firms i
QUESTION SHEET 2
1. The following are projected free cash flows to equity (per share) for a company that is
expected to be in high growth for the next 3 years. The firm's beta is also expected to change
over the 3-year period:
Assume that after year 3, th
QUESTION SHEET 1
Question 1:
You are trying to estimate the beta for InfoSoft, a firm that produces entertainment
software.
The stock is currently trading at $ 40 per share, and there are 250 million shares
outstanding; the firm has no debt outstanding. I
Expected return on a one-year bond with an adjustment for default probability
Face value (F)
Price (P)
Annual coupon rate (Q)
Default probability
Recovery percentage
Expected period 1 cash flow
Expected return
100
90
8%
20%
40%
default=1-pi
94.40
4.89%
A
SETTING UP THE FINANCIAL STATEMENT MODEL
Sales growth
Curent assets/ Sales
Current liabilities/ Sales
Net fixed assets/ Sales
COGS/ Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and MKTable securities
Tax rate
Dividend payout ratio
Y
SETTING UP THE FINANCIAL STATEMENT MODEL
Sales growth
Curent assets/ Sales
Current liabilities/ Sales
Net fixed assets/ Sales
COGS/ Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and MKTable securities
Tax rate
Dividend payout ratio
Y
Calculating Abbott's Cost of Debt
Method 1: Abbott's Average Cost of Debt
Million $
Long term debt
Short term debt and current portion of long term debt
Total debt
End 2011
2011 Interest expense
Interest as percentage of average 2010-2011 debt
End 2010
1,
Lecture 10: Immunization
Strategies
Strategies
By Lan Nguyen
Text book: Chapter 21
Definition
Definition
If
a bond portfolio has the same payoff
at some specific future date, no matter
what interest-rate structure prevails,
then it is said to be immunized
Lecture 9: Duration
Lecture
By Lan Nguyen
Text book: Chapter 20
Definition
Definition
Duration is a measure of the sensitivity
of bond price to changes in the interest
rate at which the bond is discounted. It
is widely used as a risk measure for
bonds.
Ma
Lecture 7:
Fundamental Principles of
Relative Valuation
- Earnings multiples
By Lan Nguyen
Ref 1: Chapter 17,18
Aswath Damodaran
1
The Essence of relative valuation?
s
s
In relative valuation, the value of an asset is compared to the values assessed
by th
Lecture 6:
Financial Analysis of Leases
Financial
By Lan Nguyen
Text book: Chapter 5
Terminology
Terminology
Lessee:
User/renter of the asset
Lessor: Owner of asset
Receives periodic rent
Receives depreciation tax shield
Owns asset at end of lease (sal
Lecture 4: FIRM VALUATION:
COST OF CAPITAL AND APV
APPROACHES
APPROACHES
By Lan Nguyen
Ref 1: Chapter 15
Free Cash flow to the Firm
Free
Sum
of the CF to all claim holders in
the firm (stockholders, bondholders,
preferred stockholders)
FCFF
= Free CF to E
LECTURE 3:
Financial Statement Modeling
Financial
By Lan Nguyen
Text book: Chapter 3
Basic corporate valuation
model
model
Enterprise value =
Free cash flows,
Present Value
discounted at WACC
TheEnterpriseValueisthevalueofthefirmsoperating
activities(a
LECTURE 1 (CONT) + LECTURE 2
RISKLESS RATE AND RISK PREMIUM
COST OF CAPITAL
By Lan Nguyen
Damodaran: Chapter 7
Aswath Damodaran
1
Discounted Cash Flow Valuation: The Steps
s
Estimate the discount rate or rates to use in the valuation
s
s
s
s
Discount rate
Lecture 1:
An Introduction to Valuation
By Lan Nguyen
Damodaran: Chapter 1,2
Aswath Damodaran
1
Misconceptions about Valuation
s
Myth 1: A valuation is an objective search for true value
s
Myth 2.: A good valuation provides a precise estimate of value
s
T