# DCF and WACC calculation: Theory meets practice

Save this PDF as:

Size: px
Start display at page:

## Transcription

1 DCF and WACC calculation: Theory meets practice

2 Table of contents Section 1. Fair value and company valuation page 3 Section 2. The DCF model: Basic assumptions and the expected cash flows page 6 Section 3. And what about the discount rate? page 12 Slide 2

3 Section 1 Fair value and company valuation Slide 3

4 Let s have a look on the different kinds of value Market value (Tax and general; objective/standalone basis) Fair value (Accounting) Economic value Market value (Price/M&A) Fair value (Legal issues) Value in use (Accounting) or Investment Value (particular investor's subjective view) Slide 4

5 There are different valuation methods within two common approaches that are used for determining the value of a company Income approach Market approach (Multiples) Gross value (Enterprise Value) Net value (Equity Value) Gross value (Enterprise Value) Net value (Equity Value) DCF methods: DCF methods: Discounted dividends EBIT multiple WACCapproach APVapproach Equityapproach EBITDAmultiple Sales- Multiple Price-Book- Multiple Price- Earnings- Multiple Slide 5

6 Section 2 The DCF model: Basic assumptions and the expected cash flows Slide 6

7 In the WACC approach expected cash flows are discounted with a risk adjusted discount rate Future business cash flows (CFs) are uncertain. Therefore expected cash flows are discounted (E(CF)). Present Value t n 0 E( CF) (1 k) t t The discount rate (k) contains a risk premium. Commonly the WACC is used as an estimate of k and thus "Gross Value" is determined Slide 7

8 The equivalence principle: In the DCF method expected cash flows and the discount rate shall fit together These two sets of cash flows have the same expected value (mean), but different risks. The way a standard DCF model obtains different values is to assign them different discount rates. Risk-adjusted discount rate: In a standard DCF model, the discount rate consists of the risk-free interest rate and a risk premium. It is most likely that the (future) cash flows do not necessarily equal the expected cash flows. Riskier Less risky Probability distributions for risky future cash flows Slide 8

9 Theory meets practice (1/2): Are the cash flows reasonably symmetrical? Judgment call: What to do if the cash flows are not reasonably symmetrical... How certain are my expected cash flows: Discuss the process of creating cash flows and the purpose for which they are prepared, e.g. budgets, management bonus, accounting, bank financing, etc. Consider thoroughness of preparation Consider likely bias of preparation Consider market-specific and entity-specific factors Assess sustainability of corporate strategy/structure Slide 9

10 Theory meets practice (2/2): What to do if the cash flows are not realistic? Adjusting cash flows is normally the preferred approach. Two alternatives if cash flow projections are not realistic: 1. Adjust discount rate Subjective quick fix But how do you determine the discount rate adjustment...? 2. Adjust cash flows Discuss and agree on sensible adjustments Consider market and economic data Consider ranges and sensitivity analysis Slide 10

11 Note: Thinking about cash flows starts with the business involved, not with the accounting figures. Trying to understand the underlying business 1. Strategic issues Competitive advantages: interdependencies Value chain/market forces : basic needs 2. Value flexibility Timing issues/decisions on scale Interactions/Technology/Innovation Learning effects/choice of scope Slide 11

12 Section 3 And what about the discount rate? Slide 12

13 Remember: The DCF method is based on the equivalence principle Denomination of the discount rate in the cash flow currency The discount rate should meet applied future economic income measure (Cash Flow), i.e. WACC is applied to Cash Flow to Firm and Cost of Equity is applied to Cash Flow to Equity (CFE) CF r UAH UAH OR CF r EUR EUR CF r UAH EUR OR CF r EUR UAH Note: A mix of currencies is not possible... Slide 13

14 The weighted average cost of capital take the cost of equity and the cost of debt into consideration wacc E re rd (1- TC ) E D D Where: r E Cost of Equity r D Cost of Debt E Market value of Equity D Market value of Debt TC Corporate Tax Rate Slide 14

15 E re rd (1- TC ) In the CAPM the cost of equity is based on the risk free rate and a risk premium wacc D r EUR E EUR EUR r rf Stock, Index MRP EUR Index Risk free rate determined by currency (e.g. EUR) and AAA rated countries General comments Comparable company or peer group companies Market portfolio: Reflects the investment opportunity of the investor (e.g. local vs. global) CAPM widely accepted in theory and practice (although empirical power has been challenged) Interest rate / cost of capital is always related to a certain currency, e.g. UAH risk free interest rate EUR risk free interest rate or USD risk free interest rate EUR risk free interest rate in general In the long run any difference should be explained by the differential in expected inflation rate. Slide 15

16 The risk free interest rate should always be risk free also in times like today wacc E re rd (1- TC ) D General comments Denomination of risk free interest rate in the cash flow currency (remember the equivalence principle) Related to AAA rated countries (risk free!?) If a risk free interest rate in the valuation currency is not available, conversion into the valuation currency through estimation of long term inflation differential Maturity linked to valuation object (in general long term interest rate, duration of the project/business) Possible sources: Bloomberg, Thomson Financial, Datastream etc. ECB etc. Slide 16

17 E re rd (1- TC ) In case that the business plan is in UAH a risk free rate should be used considering future inflation rate differentials wacc D According to practice, even if the business plan would be given in UAH we would not use a UAH interest rate without any further considerations as we would expect the yield to account for certain default risk as Ukraine is not AAA rated. Supposed solution would rather be to adjust the EUR risk free rate by an estimation for the inflation rate differential and a country risk premium or to use UAH sovereign rate and be aware of certain default risks already included there = country risk premium. Slide 17

18 In case that the business plan is in EUR a EUR risk free rate should be used and country risk should be added Apply a EUR interest rate due to equivalence reasons, i.e. if the cash flow is in EUR it has to be discounted by a EUR discount rate and vice versa. In addition, we can assume that this rate is (quasi) risk free. Standard approach is to apply risk free rate derived from sovereign bonds having a maturity correspondent to the duration of cash flows taking into account liquidity aspects of the underlying bond market ( 10y up to 20 or 30 years). Svensson-Method is rarely applied due to complexity and is only available for some countries, however most accurate. Note: Country risk should be added, e.g. it can be estimated by the yield differential (spread) between (EUR) USDdenominated sovereign bonds and (German) US government bonds wacc E re rd (1- TC ) D Slide 18

19 The currency of the business plan also determines the setting of the beta The Bloomberg currency default setting should always be taken into consideration as different currency settings lead to different betas. Moreover, we assume that the investor can diversify globally. Thus, we would recommend to use a global market index (e.g. MSCI World). Data: total return indices (however, use of price indices may have little impact on beta estimation as dividends only influence single data points) Frequency: monthly data, period: five years (three years) Unlevering / relevering: Harris & Pringle wacc E re rd (1- TC ) D Slide 19

20 Different currency exposures may lead to (significantly) different beta values Foreign currency Euro Slide 20

21 E wacc re rd (1- TC ) And what about the data points of the beta? D Slide 21

22 E re rd (1- TC ) There are many market risk premia all over the world... wacc D Source: experience and research Slide 22

23 Regarding the debt component in the WACC there is a big variety of instruments What is debt: A promise to make regular interest payments and to repay the principal (i.e the original amount borrowed) according to an agreed schedule. Plain vanilla debt is paid before equity, but does not share in the upside potential of equity returns. wacc E re rd (1- TC ) D Money market debt Bank debt Leases Bond market Commercial papers Short term (Overdraft) loans Financial lease Fixed coupon, variable coupon, callable Long term Slide 23

24 Based on the debt mixture the cost of debt is calculated We suggest to estimate the cost of debt as the weighted average cost of the portfolio of interest bearing debt instruments used by the firm. Companies often don t have sufficient long-term borrowings to be consistent with long-term debt finance in gearing assumption. Therefore they will need to roll over the short term borrowings. This assumption can be benchmarked against the forward interest rates, which give an indication of the market rate for the follow-up funding conditions. Theoretically, we will end up with an interest rate according to the spot rate with company s asset duration Or: Refinancing / prolongation risk may be considered as part of beta Slide 24

25 In the end we get the WACC... wacc E re rd (1- TC ) D Parameter 20XX 20XY Comments Risk-free rate, USD 2,66% 2,66% Yield to maturity for US Treasury papers with maturity in 20 years as of Valuation Date Equity risk premium 5,00% 5,00% Best practice Unlevered Beta 1,00 1,00 Relevered Beta 1,39 1,42 YTM for US Treasury papers 1,92% 1,92% YTM for Ukrainian eurobonds 9,40% 9,40% Sovereign risk of Ukraine 7,34% 7,34% Cost of equity, for USD-denominated CFs 16,92% 17,10% Yield to maturity for US Treasury papers with maturity in 10 years as of Valuation Date Yield to maturity for Ukrainian USD eurobonds with maturity in 2021 Forecasted long-term inflaiton in the USA 1,9% 1,90% US CPI for 2020 Forecasted long-term inflation in Ukraine 3,4% 3,40% Ukraine CPI for 2020 Cost of equity, for UAH-denominated CFs 18,65% 18,82% Debt-to-Equity ratio 50,00% 50,00% Research data Weight of Equity 66,7% 66,7% Weight of Debt 33,3% 33,3% Cost of debt, for UAH-denominated CFs 12,00% 12,00% Weigted average effective interest rate for the company's loans and bonds Effective tax rate 23,0% 16,0% Corporate tax rate Weighted average cost of capital 15,51% 15,91% Slide 25

26 We will be glad to answer your questions and to discuss any further issues. Andreas Pfeil Senior Manager Corporate Finance - Valuation & Strategy Kyiv Ukraine Mobile This publication has been prepared for general guidance on matters of interest only, and does not constitute professional adv ice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, [insert legal name of the firm], its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or any one else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it Limited liability company «PricewaterhouseCoopers». All rights reserved. In this document and «PricewaterhouseCoopers» refer to Limited liability company «PricewaterhouseCoopers», which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

### E. V. Bulyatkin CAPITAL STRUCTURE

E. V. Bulyatkin Graduate Student Edinburgh University Business School CAPITAL STRUCTURE Abstract. This paper aims to analyze the current capital structure of Lufthansa in order to increase market value

### Some common mistakes to avoid in estimating and applying discount rates

Discount rates Some common mistakes to avoid in estimating and applying discount rates One of the most critical issues for an investor to consider in a strategic acquisition is to estimate how much the

### Chapter 3 Fixed Income Securities

Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixed-income securities. Stocks. Real assets (capital budgeting). Part C Determination

### Chapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.)

Chapter 6 Interest Rates And Bond Valuation Learning Goals 1. Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. 2. Review the legal aspects of bond financing

### Topics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk

Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow

Chapter 6 Interest rates and Bond Valuation 2012 Pearson Prentice Hall. All rights reserved. 4-1 Interest Rates and Required Returns: Interest Rate Fundamentals The interest rate is usually applied to

### CFS. Syllabus. Certified Finance Specialist. International benchmark in Finance profession

CFS Certified Finance Specialist Syllabus International benchmark in Finance profession Certified Finance Specialist Summary: This award will provide candidates the opportunity to gain advanced level knowledge

### Cost of Capital - WACC Mobile networks

ITU EXPERT-LEVEL TRAINING ON NETWORK COST MODELING FOR ASIA AND PACIFIC COUNTRIES LEVEL II Cost of Capital - WACC Mobile networks Bangkok, Thailand 15-19 November 2010 Note: The views expressed in this

### Things to Absorb, Read, and Do

Things to Absorb, Read, and Do Things to absorb - Everything, plus remember some material from previous chapters. This chapter applies Chapter s 6, 7, and 12, Risk and Return concepts to the market value

### NIKE Case Study Solutions

NIKE Case Study Solutions Professor Corwin This case study includes several problems related to the valuation of Nike. We will work through these problems throughout the course to demonstrate some of the

### Maturity The date where the issuer must return the principal or the face value to the investor.

PRODUCT INFORMATION SHEET - BONDS 1. WHAT ARE BONDS? A bond is a debt instrument issued by a borrowing entity (issuer) to investors (lenders) in return for lending their money to the issuer. The issuer

### Contribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257)

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2012 Answers 1 (a) Calculation of net present value (NPV) As nominal after-tax cash flows are to be discounted, the nominal

### CHAPTER 14 COST OF CAPITAL

CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,

### Bonds, Preferred Stock, and Common Stock

Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1-year discount bond with a \$100 face value. What is the most the investor would pay for 2. An

### Equity Market Risk Premium Research Summary. 12 April 2016

Equity Market Risk Premium Research Summary 12 April 2016 Introduction welcome If you are reading this, it is likely that you are in regular contact with KPMG on the topic of valuations. The goal of this

### Futures Price d,f \$ 0.65 = (1.05) (1.04)

24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding

### Understanding Fixed Income

Understanding Fixed Income 2014 AMP Capital Investors Limited ABN 59 001 777 591 AFSL 232497 Understanding Fixed Income About fixed income at AMP Capital Our global presence helps us deliver outstanding

### Certified Financial Management Professional VS-1201

Certified Financial Management Professional VS-1201 Certified Financial Management Professional Certified Financial Management Professional Certification Code VS-1201 Vskills certification for Financial

### Forecasting and Valuation of Enterprise Cash Flows 1. Dan Gode and James Ohlson

Forecasting and Valuation of Enterprise Cash Flows 1 1. Overview FORECASTING AND VALUATION OF ENTERPRISE CASH FLOWS Dan Gode and James Ohlson A decision to invest in a stock proceeds in two major steps

Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual

### NPH Fixed Income Research Update. Bob Downing, CFA. NPH Senior Investment & Due Diligence Analyst

White Paper: NPH Fixed Income Research Update Authored By: Bob Downing, CFA NPH Senior Investment & Due Diligence Analyst National Planning Holdings, Inc. Due Diligence Department National Planning Holdings,

### INTERVIEWS - FINANCIAL MODELING

420 W. 118th Street, Room 420 New York, NY 10027 P: 212-854-4613 F: 212-854-6190 www.sipa.columbia.edu/ocs INTERVIEWS - FINANCIAL MODELING Basic valuation concepts are among the most popular technical

### Agenda ref. Paper topic. 2. We. (a) (b) 4. The. 5. The. risk. 3. This paper: in public and. Page 1 of 12

Agenda ref 1 STAFF PAPER Capital Markets Advisory Committee Meeting 12 October 2011 Paper topic Risk-free rate of return This paper has been prepared by the staff of the IFRS Foundationn for discussion

### Chapter 5: Valuing Bonds

FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A long-term debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations

### Chapter 14 Capital Structure in a Perfect Market

Chapter 14 Capital Structure in a Perfect Market 14-1. Consider a project with free cash flows in one year of \$130,000 or \$180,000, with each outcome being equally likely. The initial investment required

### Certification Program on Corporate Treasury Management

Certification Program on Corporate Treasury Management Introduction to corporate treasury management Introduction to corporate treasury management: relevance, scope, approach and issues Understanding treasury

### Examiner s report F9 Financial Management June 2013

Examiner s report F9 Financial Management June 2013 General Comments The examination consisted of four compulsory questions, each worth 25 marks. Most candidates attempted all four questions and there

### Equity Analysis and Capital Structure. A New Venture s Perspective

Equity Analysis and Capital Structure A New Venture s Perspective 1 Venture s Capital Structure ASSETS Short- term Assets Cash A/R Inventories Long- term Assets Plant and Equipment Intellectual Property

### Models of Risk and Return

Models of Risk and Return Aswath Damodaran Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for

### CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.

### Global Equity Financing-1

Global Equity Financing-1 Global Equity Financing Prof. Ian Giddy New York University Corporate Finance CORPORATE FINANCE DECISONS INVESTMENT FINANCING RISK MGT MGT PORTFOLIO CAPITAL M&A DEBT EQUITY MEASUREMENT

### DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2.

DUK UNIRSITY Fuqua School of Business FINANC 351 - CORPORAT FINANC Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%. Consider a firm that earns \$1,000

### The cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction

The cost of capital A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction... 1 2. Determining the proportions of each source of capital that will be raised... 3 3. Estimating the marginal

### Bonds and Yield to Maturity

Bonds and Yield to Maturity Bonds A bond is a debt instrument requiring the issuer to repay to the lender/investor the amount borrowed (par or face value) plus interest over a specified period of time.

### Cost of Capital and Project Valuation

Cost of Capital and Project Valuation 1 Background Firm organization There are four types: sole proprietorships partnerships limited liability companies corporations Each organizational form has different

### Cost of Capital, Valuation and Strategic Financial Decision Making

Cost of Capital, Valuation and Strategic Financial Decision Making By Dr. Valerio Poti, - Examiner in Professional 2 Stage Strategic Corporate Finance The financial crisis that hit financial markets in

### The Tangent or Efficient Portfolio

The Tangent or Efficient Portfolio 1 2 Identifying the Tangent Portfolio Sharpe Ratio: Measures the ratio of reward-to-volatility provided by a portfolio Sharpe Ratio Portfolio Excess Return E[ RP ] r

### Discounted Cash Flow Valuation: Basics

Discounted Cash Flow Valuation: Basics Aswath Damodaran Aswath Damodaran 1 Discounted Cashflow Valuation: Basis for Approach Value = t=n CF t t =1(1+r) t where CF t is the cash flow in period t, r is the

### BF 6701 : Financial Management Comprehensive Examination Guideline

BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1-hour exam. 2) The topics included in those essay and

### Expected default frequency

KM Model Expected default frequency Expected default frequency (EDF) is a forward-looking measure of actual probability of default. EDF is firm specific. KM model is based on the structural approach to

### Fundamentals Level Skills Module, Paper F9

Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2008 Answers 1 (a) Rights issue price = 2 5 x 0 8 = \$2 00 per share Theoretical ex rights price = ((2 50 x 4) + (1 x 2 00)/5=\$2

### 1 (a) Net present value of investment in new machinery Year 1 2 3 4 5 \$000 \$000 \$000 \$000 \$000 Sales income 6,084 6,327 6,580 6,844

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2013 Answers 1 (a) Net present value of investment in new machinery Year 1 2 3 4 5 \$000 \$000 \$000 \$000 \$000 Sales income 6,084

### If you ignore taxes in this problem and there is no debt outstanding: EPS = EBIT/shares outstanding = \$14,000/2,500 = \$5.60

Problems Relating to Capital Structure and Leverage 1. EBIT and Leverage Money Inc., has no debt outstanding and a total market value of \$150,000. Earnings before interest and taxes [EBIT] are projected

### CHAPTER 13 Capital Structure and Leverage

CHAPTER 13 Capital Structure and Leverage Business and financial risk Optimal capital structure Operating Leverage Capital structure theory 1 What s business risk? Uncertainty about future operating income

### ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure

ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure Chapter 9 Valuation Questions and Problems 1. You are considering purchasing shares of DeltaCad Inc. for \$40/share. Your analysis of the company

### t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

### PowerShares Smart Beta Income Portfolio 2016-1 PowerShares Smart Beta Growth & Income Portfolio 2016-1 PowerShares Smart Beta Growth Portfolio 2016-1

PowerShares Smart Beta Income Portfolio 2016-1 PowerShares Smart Beta Growth & Income Portfolio 2016-1 PowerShares Smart Beta Growth Portfolio 2016-1 The unit investment trusts named above (the Portfolios

### UTILITY REGULATOR WATER. Water & Sewerage Services Price Control 2015-21

Water & Sewerage Services Price Control 2015-21 Final Determination Annex A Financing Investment December 2014 Contents Page Water and Sewerage Services Price Control 2015-21 Final Determination Annex

### Fixed-income opportunity: Short duration high yield

March 2014 Insights from: An income solution for a low or rising interest-rate environment Generating income is a key objective for many investors, and one that is increasingly difficult to achieve in

### Investment insight. Fixed income the what, when, where, why and how TABLE 1: DIFFERENT TYPES OF FIXED INCOME SECURITIES. What is fixed income?

Fixed income investments make up a large proportion of the investment universe and can form a significant part of a diversified portfolio but investors are often much less familiar with how fixed income

### Methodological Tool. Draft tool to determine the weighted average cost of capital (WACC) (Version 01)

Page 1 Methodological Tool Draft tool to determine the weighted average cost of capital (WACC) (Version 01) I. DEFINITIONS, SCOPE, APPLICABILITY AND PARAMETERS Definitions For the purpose of this tool,

### A GUIDE TO AUSTRALIAN FIXED INCOME INVESTING

A GUIDE TO AUSTRALIAN FIXED INCOME INVESTING The Australian fixed income market vs the Australian share market The Australian share market is dynamic. On any given trading day, share prices may move rapidly

### CORPORATE FINANCE REVIEW FOR THIRD QUIZ. Aswath Damodaran

CORPORATE FINANCE REVIEW FOR THIRD QUIZ Aswath Damodaran Basic Skills Needed What is the trade off involved in the capital structure choice? Can you estimate the optimal debt ratio for a firm using the

### FNCE 301, Financial Management H Guy Williams, 2006

REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including

FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin-534/fin-534-week-4-quiz-3- str/ For more course tutorials visit www.tutorialoutlet.com Which of the following

### Valuation Practices Survey 2013 kpmg.com.au

CORPORATE FINANCE Valuation Practices Survey 203 kpmg.com.au 203 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative

### Chapter 11 Calculating the Cost of Capital

Chapter 11 Calculating the Cost of Capital (def) - Cost of obtaining money to fund asset purchase - use as estimate of r (discount rate) If we can earn more than the cost of capital (r) from a project

### BASKET A collection of securities. The underlying securities within an ETF are often collectively referred to as a basket

Glossary: The ETF Portfolio Challenge Glossary is designed to help familiarize our participants with concepts and terminology closely associated with Exchange- Traded Products. For more educational offerings,

### Assumptions: No transaction cost, same rate for borrowing/lending, no default/counterparty risk

Derivatives Why? Allow easier methods to short sell a stock without a broker lending it. Facilitates hedging easily Allows the ability to take long/short position on less available commodities (Rice, Cotton,

### Swaps: complex structures

Swaps: complex structures Complex swap structures refer to non-standard swaps whose coupons, notional, accrual and calendar used for coupon determination and payments are tailored made to serve client

### Question 1. Marking scheme. F9 ACCA June 2013 Exam: BPP Answers

Question 1 Text references. NPV is covered in Chapter 8 and real or nominal terms in Chapter 9. Financial objectives are covered in Chapter 1. Top tips. Part (b) requires you to explain the different approaches.

### Spectrum Insights. Bond and stock market around the same size Australian bonds vs Australian stock market

Market capitalization \$b Spectrum Insights Damien Wood, Principal JUNE 9, 2015 Corporate bonds often provides investors with an income stream that is above deposit rates, but less risky than dividends

### Exam 1 Morning Session

91. A high yield bond fund states that through active management, the fund s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark

### MBA 8230 Corporation Finance (Part II) Practice Final Exam #2

MBA 8230 Corporation Finance (Part II) Practice Final Exam #2 1. Which of the following input factors, if increased, would result in a decrease in the value of a call option? a. the volatility of the company's

### Financial-Institutions Management. Solutions 1. 6. A financial institution has the following market value balance sheet structure:

FIN 683 Professor Robert Hauswald Financial-Institutions Management Kogod School of Business, AU Solutions 1 Chapter 7: Bank Risks - Interest Rate Risks 6. A financial institution has the following market

### Capital preservation strategy update

Client Education Summit 2012 Capital preservation strategy update Head of Institutional Fixed Income Investments, Americas October 9, 2012 Topics for discussion 1 Capital preservation strategies 2 3 4

### Midland Energy/Sample 2. Midland Energy Resources, Inc.

Midland Energy Resources, Inc. Midland Energy Resources, Inc. is a global energy company that operates in oil and gas exploration and production (E&P), refining and marketing (R&M), and petrochemicals.

### CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are

### VALUING BANKING STOCKS

June 2003 VALUING BANKING STOCKS A Synopsis on the Basic Models The Pros & Cons Utilizing Evidence from European Equity Research Practices Nicholas I. Georgiadis Director of Research - VRS ( Valuation

### INTEREST RATE SWAP (IRS)

INTEREST RATE SWAP (IRS) 1. Interest Rate Swap (IRS)... 4 1.1 Terminology... 4 1.2 Application... 11 1.3 EONIA Swap... 19 1.4 Pricing and Mark to Market Revaluation of IRS... 22 2. Cross Currency Swap...

### Finance 3130 Corporate Finiance Sample Final Exam Spring 2012

Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 True/False Indicate whether the statement is true or falsewith A for true and B for false. 1. Interest paid by a corporation is a tax deduction

### Estimating Beta. Aswath Damodaran

Estimating Beta The standard procedure for estimating betas is to regress stock returns (R j ) against market returns (R m ) - R j = a + b R m where a is the intercept and b is the slope of the regression.

### Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator

University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights

### 2. Determine the appropriate discount rate based on the risk of the security

Fixed Income Instruments III Intro to the Valuation of Debt Securities LOS 64.a Explain the steps in the bond valuation process 1. Estimate the cash flows coupons and return of principal 2. Determine the

### Bond valuation and bond yields

RELEVANT TO ACCA QUALIFICATION PAPER P4 AND PERFORMANCE OBJECTIVES 15 AND 16 Bond valuation and bond yields Bonds and their variants such as loan notes, debentures and loan stock, are IOUs issued by governments

### Leverage. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Overview

Leverage FINANCE 35 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University Overview Capital Structure does not matter! Modigliani & Miller propositions Implications for

FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended February 1, 2015 (the 2014 fiscal

### Chapter 13, ROIC and WACC

Chapter 13, ROIC and WACC Lakehead University Winter 2005 Role of the CFO The Chief Financial Officer (CFO) is involved in the following decisions: Management Decisions Financing Decisions Investment Decisions

### Chapter 12. Page 1. Bonds: Analysis and Strategy. Learning Objectives. INVESTMENTS: Analysis and Management Second Canadian Edition

INVESTMENTS: Analysis and Management Second Canadian Edition W. Sean Cleary Charles P. Jones Chapter 12 Bonds: Analysis and Strategy Learning Objectives Explain why investors buy bonds. Discuss major considerations

### The Cost of Capital. Chapter 10. Cost of Debt (r d ) The Cost of Capital. Calculating the cost of obtaining funds for a project

The Cost of Capital Chapter 10 (def) - Cost of obtaining money to fund asset purchase - use as estimate of r (discount rate) If we can earn more than the cost of capital (r) from a project than company

### SBERBANK GROUP S IFRS RESULTS. March 2015

SBERBANK GROUP S IFRS RESULTS 2014 March 2015 SUMMARY OF PERFORMANCE FOR 2014 STATEMENT OF PROFIT OR LOSS Net profit reached RUB 290.3bn (or RUB 13.45 per ordinary share), compared to RUB 362.0bn (or RUB

### Cash flow before tax 1,587 1,915 1,442 2,027 Tax at 28% (444) (536) (404) (568)

Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2014 Answers 1 (a) Calculation of NPV Year 1 2 3 4 5 \$000 \$000 \$000 \$000 \$000 Sales income 5,670 6,808 5,788 6,928 Variable

### NASAA Investment Adviser Competency Exam (Series 65) Exam Specifications and Outline (Effective 1/1/2010)

NASAA Investment Adviser Competency Exam (Series 65) Exam Specifications and Outline (Effective 1/1/2010) CONTENT AREA # of Items 1. Economic Factors and Business Information 19 (14%) A. Basic economic

### Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.)

Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.) The primary focus of the next two chapters will be to examine the debt/equity choice by firms. In particular,

### TYLER JUNIOR COLLEGE School of Continuing Studies 1530 SSW Loop 323 Tyler, TX 75701 1.800.298.5226 www.tjc.edu/continuingstudies/mycaa

TYLER JUNIOR COLLEGE School of Continuing Studies 1530 SSW Loop 323 Tyler, TX 75701 1.800.298.5226 www.tjc.edu/continuingstudies/mycaa Education & Training Plan Finance Professional Program Student Full

### SAMPLE MID-TERM QUESTIONS

SAMPLE MID-TERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID- TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,

### Chapter 17 Does Debt Policy Matter?

Chapter 17 Does Debt Policy Matter? Multiple Choice Questions 1. When a firm has no debt, then such a firm is known as: (I) an unlevered firm (II) a levered firm (III) an all-equity firm D) I and III only

### American Options and Callable Bonds

American Options and Callable Bonds American Options Valuing an American Call on a Coupon Bond Valuing a Callable Bond Concepts and Buzzwords Interest Rate Sensitivity of a Callable Bond exercise policy

### Advanced Corporate Finance Valuation I. Thomas J. Chemmanur Carroll School of Management Boston College

Advanced Corporate Finance Valuation I Thomas J. Chemmanur Carroll School of Management Boston College Valuation A variety of circumstances where value has to be established without using market value:

### Eagle Asset Management. REIT manager. Analyst Presentation. Acquisition of 3 Floors of Citibank Tower 4Q 2006 Version 1.0. Eagle Asset Management

REIT manager Analyst Presentation Acquisition of 3 Floors of Citibank Tower 4Q 2006 Version 1.0 1 Important Notice This document may contain information which is proprietary, confidential and/or legally

### CHAPTER 22: FUTURES MARKETS

CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support

### Paper F9. Financial Management. Friday 7 June 2013. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants.

Fundamentals Level Skills Module Financial Management Friday 7 June 2013 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Formulae

### Paper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants

Fundamentals Pilot Paper Skills module Financial Management Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper

### Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS

Chapter 9 Bonds and Their Valuation ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 9-1 a. A bond is a promissory note issued by a business or a governmental unit. Treasury bonds, sometimes referred to as

### EQUITY LINKED NOTES: An Introduction to Principal Guaranteed Structures Abukar M Ali October 2002

EQUITY LINKED NOTES: An Introduction to Principal Guaranteed Structures Abukar M Ali October 2002 Introduction In this article we provide a succinct description of a commonly used investment instrument

The consequence of failing to adjust the discount rate for the risk implicit in projects is that the firm will accept high-risk projects, which usually have higher IRR due to their high-risk nature, and

### You just paid \$350,000 for a policy that will pay you and your heirs \$12,000 a year forever. What rate of return are you earning on this policy?

1 You estimate that you will have \$24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each

### PRACTICE EXAM QUESTIONS ON WACC

Dr. Sudhakar Raju Financial Statements Analysis (FN 6450) PRACTICE EXAM QUESTIONS ON WACC 1. The return shareholders require on their investment in a firm is called the: a. dividend yield. B. cost of equity.