FINS3641: SECURITY ANALYSIS AND
VALUATION
CHAPTER XXVIII PROBLEM 1
Option to delay
A company is considering delaying a project with aftertax cash flows of $25 million but that
costs $300 million to take on. Life of the project is 20 years. Cost of capita
Chapter 9 The Capital Asset Pricing Model
Multiple Choice Questions
1. In the context of the Capital Asset Pricing Model (CAPM) the relevant measure of risk
is
A) unique risk.
B) beta.
C) standard deviation of returns.
D) variance of returns.
E) none of t
FINS3641: SECURITY ANALYSIS AND
VALUATION
CHAPTER XIII PROBLEM 1
True or False:
A. The dividend discount model cannot be used to value a highgrowth company that pays
no dividends.
False
The dividend discount model can still be used to value the dividends
FINS3641: SECURITY ANALYSIS AND
VALUATION
CHAPTER XV PROBLEM 1
True or False?
FCFF is always higher than FCFE
FALSE
If the firm has no debt, FCFF and FCFE can be equal. If there are net debt issues FCFE can
be higher.
FCFF is the cumulated cash flow to al
FINS3641: SECURITY ANALYSIS AND
VALUATION
CHAPTER XVII PROBLEM 1
A. What is the difference between the ratios?
Current PE = Price / Current EPS
Uses EPS from last annual report
Trailing PE = Price / Trailing EPS
Includes quarterly results to form the mo
Question Selector
Part A
TBond Yield
Risk Premium
Length
EPS Growth
Payout
Beta
Cost of Equity
P/E
Total P/E
7.00%
5.50%
High Growth
5
15.00%
10%
1.25
13.88%
Stable Growth
N/A
6%
50%
1.1
13.05%
0.5150
8.4115
7.8965
`
Part A
Part B
Part C
Historical Earni
FINS3641: SECURITY ANALYSIS AND
VALUATION
CHAPTER XIX PROBLEM 1
TRUE OR FALSE?
A stock that sells for less than its book value is undervalued.
FALSE
If ROE is less than its cost of equity, the market value can be lower than the book value
If a companys RO
TBond Yield
Risk Premium
Length
EPS Growth
Payout
Beta
Cost of Equity
Return on Equity
P/BV
Total P/BV
7.25%
5.50%
High Growth
5
30.00%
10%
1.65
16.33%
21%
Stable Growth
N/A
6%
60%
1.1
13.30%
21%
0.15
3.34
3.19
`
Part A
Part B
Part C
High Growth Rate
15%
OPTIONWORKSHEET:LONGTERMOPTIONS
Present value of cash flows from investing in project now
$148.22
(in currency)
Annualized standard deviation in ln(present value of CF)
20.00%
(in %)
Initial investment needed to take project (in PV $) =
$300.00
(in curren
FINS3641: SECURITY ANALYSIS AND
VALUATION
CHAPTER XXIX PROBLEM 2
Option for financial flexibility Skates Inc.
Currently unlevered with a cost of equity of 12%. Cost of capital is 11% if it as the optimal
debt ratio of 40%. The management, however insists
Eileen Kang
Discounted Cash Flow, Relative Valuation, Options Models
Revision: Security Analysis and Valuation Tutorial Notes
Discounted Cash Flow
a
There are three paths to discounted cashflow valuation  the first is to value just the equity stake in th
FINS3641 SECURITY
ANALYSIS & VALUATION
W EEK 2
T UTORIAL
Prepared by Ping Du 2012
ASB School of Banking and Finance
CONTACT DETAILS
Your tutor:
Ping Du
ping.du@unsw.edu.au
Tutor consultation email only
Tutorincharge:
Aaron Chan
aaron.chan@unsw.edu.au
Le
FINS3641 SECURITY
ANALYSIS & VALUATION
W EEK 3
T UTORIAL
Prepared by Ping Du 2012
ASB School of Banking and Finance
TEMPLATE REVIEW

Touched on most of the essential points overall

Better performance included more short, succinct issues

Recommendatio
FINS3641: SECURITY ANALYSIS AND
VALUATION
CHAPTER XI PROBLEM 2
BIC Corporation reported a ROE of 20% and paid out 37% of its earnings as dividends in the
most recent year.
A. Assuming these fundamentals dont change, estimate the expected growth rate in ea
FINS3641 SECURITY ANALYSIS AND VALUATION
PART 2  DISCOUNT CASH FLOW VALUATION MODELS
Week 3: Measuring Earnings and Estimating Free Cash Flows
Topics:
Free Cash Flows to the Firm (FCFF)
Learning Outcomes:
Learn the techniques to translate accounting ea
FINS3641 SECURITY ANALYSIS AND VALUATION
PART 2: DISCOUNT CASH FLOW VALUATION MODELS
Week 4: Estimating Growth and Terminal Value
Topics:
Estimating the growth rate to forecast future revenues and earnings
Estimating the terminal value of a firm
Learnin
FINS3641 SECURITY ANALYSIS AND VALUATION
PART 2
DISCOUNT CASH FLOW VALUATION MODELS
Week 6
Free Cash Flow to the Firm Discount Valuation Models & Firms with Negative Earnings
Prepared by Henry Yip
1
FINS3641 SAV
Week 6: FCFF Discount Models and Valuing Fi
FINS3641 SECURITY ANALYSIS AND VALUATION
PART 3: RELATIVE VALUATION MODELS
Week 8: Fundamental Principles and Earnings Multiples
Topics:
What is relative valuation?
How do we conduct relative valuation?
Learning Outcomes:
Learn the linkage between pric
FINS3641 SECURITY ANALYSIS AND VALUATION
PART 3: RELATIVE VALUATION MODELS
Week 9: Book Value and Revenue Multiples
Topics:
Price to book value
Firm value to book value
Price to Sales
Value to Sales
Learning Outcomes:
Learn how best to apply book val
FINS3641 SECURITY ANALYSIS AND VALUATION
PART 4
CONTINGENCY CLAIM VALUATION MODELS
Week 10
Valuing Options to Expand and to Abandon
Valuing Equity in Distressed Firms
Topics & Learning Outcomes:
Application of option pricing models to the valuation of
th
FINS3641: SECURITY ANALYSIS AND VALUATION
Week 2 Solutions
The value of an investment is:
a) The present value of the cash flows on the investment
b) Determined by investor perceptions about it
c) Determined by demand and supply
d) Often a subjective esti
FINS3641: SECURITY ANALYSIS AND VALUATION
Week 3 Solutions
Explain why a sixmonth Treasury bill rate is not an appropriate riskless rate in discounting a
five year cash flow.
Because of reinvestment risk.
A sixmonth TBill is only riskless for six months
FINS3641: SECURITY ANALYSIS AND VALUATION
Week 4 Solutions
Derra Foods reports $1 billion in book value of equity and has no debt, but it uses operating
leases for all of its stores. Its most recent payment was $85m, with future operating lease
commitment
FINS3641: SECURITY ANALYSIS AND VALUATION
CHAPTER XI PROBLEM 2
BIC Corporation reported a ROE of 20% and paid out 37% of its earnings as dividends in the
most recent year.
A. Assuming these fundamentals dont change, estimate the expected growth rate in
ea
FINS3641 SECURITY ANALYSIS AND VALUATION
Market Based Valuation: Price and Enterprise Value Multiples with specific focus on the
price to book, enterprise value to sales and enterprise value to EBITDA multiples
Topics:
How do we define and apply price to
FINS3641 SECURITY ANALYSIS AND VALUATION
Financial Ratio Analysis
Topics:
Financial ratios that matter most to a security analyst
Learning Outcomes:
Be able to carry out business overview and financial ratio analysis systematically
Reading:
Koller, Goe
FINS3641 SECURITY ANALYSIS AND VALUATION
DCF VALUATION Free Cash Flow Valuation Models
Topics:
Introducing the 2nd and 3rd types of DCF models
The FCFF (free cash flow to the firm) valuation model and
The FCFE (free cash flow to equity) valuation model
FINS3641 SECURITY ANALYSIS AND VALUATION
DCF VALUATION The Discounted Dividend Model
Topics:
Introducing the 1st type of DCF model The Discounted Dividend Model (DDM)
Learn the variants of DDM
Learning Outcomes:
Learn the art of
measuring the inputs fo
FINS3641 SECURITY ANALYSIS AND VALUATION
RESIDUAL INCOME VALUATION
Topics:
Residual income valuation
Learning Outcomes:
Be able to:
Discuss the merits and limitations of residual income valuation
Justify the usage of the residual income model for equit