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2012 CFA l2 workbook 2
[...]... rate to use? www.YeaBook.org YeaBookOrg@Gmail.com 020 11 Kaplan, lnc 21 Strengths and Weaknesses of Estimating the ERP 2 Forward-Looking ERP-utilizes current market conditions and expectations concerning economic and financial variables Strength-does not require stationary Weaknesses: Requires frequent updates Makes lots of assumptions 020 11 Kaplan, Inc 22 Study Session 10 Valuation Concepts 13 Forward-Looking... B/M Liquidity premium 2% 4% - 0.8 - 0.1 Ri = 3% + 1.1(5%) + 0.4(3%) - 0.8 (2% ) - 0.1 (4%) = 020 11 Kaplan, lnc 7.7% 29 - 1 Various Required Return on Equity Models , Arbitrage Pricing Model: Competitor to CAPM Factors not specified BIRR version is closest to accepted factors: 1 Investor confidence risk 2 Time horizon risk 3 Inflation risk 4 Business-cycle risk 5 Market-timing risk 020 11 Kaplan, lnc 1I Do... Ultimately these forces affect firm valuation 1 020 11 Kaplan Inc 3 25 26 Study Session 11 Industry and Company Analysis in a Global Context Porter's Five Forces 1 Threat of entry 2 Threat of substitutes 3 Bargaining power of buyers 4 Bargaining power of suppliers 5 Rivalry among existing competitors Attractive industry? I Superior long-term profitability? I 4 -2 020 11 Kaplan, Inc Competitive Force #Threat... disparity between opinions 020 11 Kaplan, lnc 24 14 Study Session 10 Valuatior~Cor~cepts CAPM: Single Factor Required Return on Equity Model Capital Asset Pricing Model (CAPM) Risk-fee rate Expected equity risk premium P www.YeaBook.org 1 YeaBookOrg@Gmail.com I I Beta (systematic risk) - Example: Rf = 4%, ERP = 3.9%, = 0.8, then: Req return = 4 + 0.8(3.9) = 7. 12% I - 25 -4 020 11 Kaplan lnc I tifactor... OR target weights 37 -2 020 11 Kaplan, Inc Pairing of Discount Rate With Cash Flows value = FCFF, discount at WACC B ' ~ ~ u value = FCFE, discount at RE it~ Use FCFE when capital structure are not volatile Use FCFF with high debt levels, negative FCFE Equity value = firm value - MV of debt - Big Point: align the 1I discount rateYou mustcash flows! with the 020 11 Kaplan, Inc 38 -2 Study Session 10 Valuation... potential 020 11 Kaplan, Inc 11 29 30 Study Session 11 Industry and Company Ar~alysis a Global Context in Strategies for Achieving Competitive Advantage Individual firms can move entire industries to improve long-term attractiveness: Eliminate inefficiencies Improve supply chain or distribution Redistributing pricing power away from customers Create barriers to entry by increasing fixed costs 1 12 020 11 Kaplan,... percentage of the initial investment: HPR = (PI - Po + CF,) / Po HPR = Price appreciation + dividend yield You see this equation everywhere in CFA land 2 Realized Return-historical return based on observed prices and cash flows - Can be calculated as an HPR 020 11 Kaplan, lnc 16 10 Study Session 10 Valuation Concepts Seven Return Concepts 3 Expected Return-return based on forecasts of a future price... www.YeaBook.org YeaBookOrg@Gmail.com 17 020 11 Kaplan, lnc Seven Return Concepts 6 Discount Rate-rate used to determine the present value of an investment 7 Internal Rate of Return (IRR)-the rate that equates the discounted cash flows to the current market determined price - Again, you see this calculation frequently in CFA land (capital budgeting, YTM, cash flow yield, etc.) 020 11 Kaplan, lnc 18 Study Session... YeaBookOrg@Gmail.com 33- 1 020 11 Kaplan, Inc Beta Estimation: Thinly Traded and Nonpublic Firms Four-step procedure (called a pure play) 1 Identify a publicly traded firm with similar industry characteristics 2 Estimate the beta of the publicly traded firm using regression (last slide) + BE \ 3 Unlever the beta Bunleve,d = [ I/(I + I ,] E ( EB D) 4 Relever beta Bnonpublic I +(DIE = [ o,u,, n, r p 020 11 Kaplan, Inc... up-simple Ad hoc and uses historical values 020 11 Kaplan, Inc 35 International Considerations in Required Return Calculations Exchange rates-compute the required return in the home currency and adjust it by the forecast for the change in the exchange rate Emerging market premium-use a developed market benchmark and add an emerging market premium 020 11 Kaplan, lnc 36 19 20 Study Sessiorl 10 Valuatiorl Corlcepts . see this equation everywhere in CFA land 2. Realized Return-historical return based on observed prices and cash flows - Can be calculated as an HPR 020 11 Kaplan, lnc. 16 www.YeaBook.org YeaBookOrg@Gmail.com 10. biased duetosurvivorshipbias Which risk-free rate to use? 020 11 Kaplan, lnc. 2 1 Strengths and Weaknesses of Estimating the ERP 2. Forward-Looking ERP-utilizes current market conditions. require stationary Weaknesses: Requires frequent updates Makes lots of assumptions 020 11 Kaplan, Inc. 22 www.YeaBook.org YeaBookOrg@Gmail.com Study Session 10 Valuation Concepts 13 Forward-Looking