CFA II equity Formulas only

the expected holding-period return, using required rate of return

(expected alpha + Rr)

using companies that have survived all the way back to the index construction date is what type of bias?

A backfilling of index returns is expected to introduce a positive survivorship bias into returns.

FCFE given EBIT or EBITDA

Calculate FCFF

Conceptually how does the value of common equity relate to FCFF

Conceptually, the value of common equity is the present value of expected future FCFF—the total value of the company—minus the market value of outstanding debt

Return on invested capital

NOPLAT/(net operating assets less operating liabilities) ROIC is a better measure of profitability than return on equity because it is not affected by a company's degree of financial leverage. sustainably high ROIC is a sign of a competitive advantage.

how does paying cash dividends on a stock affect FCFF or FCFE

Paying cash dividends on common stock does not affct FCFF or FCFE. share repurchases of common stock also do not affect FCFF or FCFE.

CAPM beta negative means

an asset has a CAPM required rate of return that is below the risk-free rate

Holding period is sum of two components

dividend yield (DH/P0) and price appreciation return ([PH − P0]/P0), also known as the capital gains yield.

negative value beta means

growth-oriented

market beta above 1.0 means

high market risk stock

how does the failure to incorporate returns from dividends bias the impact of the equity risk premium?

it biases the equity risk premium estimate downward

EBITDA is a poor proxy for free cash flow to the firm because

it does not account for the depreciation tax shield and the investment in fixed capital and working capital

negative size beta means

large-cap

return on capital employed (ROCE)

operating profit/capital employed ROCE can be useful in several contexts, such as peer comparisons of companies in countries with different tax structures, because comparison of underlying profitability would not be biased in favor of companies benefitting from low tax rate regimes.

Does the residual income model focus on profitability or opportunity cost?

profitability

The clean surplus relation

the ending book value of equity equals the beginning book value plus earnings minus dividends,

Possible drawbacks to using EV/EBITDA include the following

A possible drawback to EV/EBITDA is that EBITDA will overestimate cash flow from operations if working capital is growing.

Analysts have offered the following rationales for using

EV/EBITDA is usually more appropriate than P/E alone for comparing companies with different financial leverage (debt), because EBITDA is a pre-interest earnings figure, in contrast to EPS, which is postinterest. By adding back depreciation and amortization, EBITDA controls for differences in depreciation and amortization among businesses, in contrast to net income, which is postdepreciation and postamortization. For this reason, EV/EBITDA is frequently used in the valuation of capital-intensive businesses (for example, cable companies and steel companies). Such businesses typically have substantial depreciation and amortization expenses. EBITDA is frequently positive when EPS is negative.

PRAT model

Growth is a function of profit margin (P), retention rate (R), asset turnover (A), and financial leverage (T).

If preferred stock dividends have been paid, how do you adjust FCFF?

If preferred stock dividends have been paid (and net income is income available to common shareholders), the preferred dividends must be added back just as after-tax interest expenses are.