valuation final

T/F: The price of a real option is generally fixed

FALSE: Unlike stock options, the price of a real option is generally NOT fixed

The exercise prices of ______ ____ can change over time and may be uncertain

real options

Underlying assumptions of the Black-Scholes-Merton (BSM) equation do not fit _____ _____

real options

______ value of flexibility to respond as uncertainty unfolds

real options

Are Private Equity hurdle rates high or low?

high

Terminal value is most important when growth rate is _____ and planning period is _____

high / short

Low EBITDA may be due to _____ risk AND/OR _____ growth opportunities relative to other firms

high risk low growth

The multiple is a function of the __________ and _______

required rate of return (k) and the growth rate (g)

if convenience yield gets lower, my option value ______

increases

Leveraged Buy-outs (LBOs) are investment strategies used to magnify _______ through the use of high _____ levels

returns debt

An option can never be worth more than a _______ option

perpetual

There are generally no ______ period cash flows to the equity holders due to _____ ______

planning cash sweep

Key assumptions with Market Comps: similar assets should have similar ____

price (Cf characteristics), risk and growth

A _______________ firm is a financial intermediary that raises pools of capital to invest in companies that need financing

private equity

When you have flexibility, _______ can contribute to value

uncertainty

Private equity firms focus on the ________ of equity investment

valuation

NPV increases when you increase the _________

volatility

When is the cap rate and the discount rate the same?

when there is no growth (g=0)

Forward prices are set so that contract has _____ fair market value

zero

Why use EBITDA to represent cash flows?

1) relatively simple to obtain 2) just need to use the accompanying multiple

_______ approach takes into account changes to capital structure over time

APV

Using ______ is beneficial because it ties the analysis of distant cash flows back to recent market transactions involving similar firms

EBITDA

T/F: Volatility of the investment and price volatility of the commodity are the same thing

FALSE: Volatility of the investment and price volatility of the commodity are TWO SEPARATE THINGS

_________ _______ provides flexibility and this flexibility is used when we can't cover the financing and operating costs

Nonrecourse debt

What do you have to match on growth and risk?

Operating costs and capital structure

An approach for evaluating investment strategies in situations where there is at least some uncertainty about how the strategy will actually be implemented

Real Options

What are embedded options associated with active management of a project?

Real Options

______ can be used to solve complex real option problems that involve multiple and interactive sources of uncertainty

Simulation

In situations where private equity investors have estimates of expected cash flows, rather than hoped-for cash flows, they should evaluate the investment using what approach?

The APV approach

T/F: EPS can be negative for high-growth firms

True

T/F: It is incorrect to use the forward prices to represent expected prices which are used to calculate expected cash flows by discounting at a risk-adjusted rate

True

T/F: Real options are based on assets that are not actively traded

True

______ approach does NOT take into account changes to capital structure over time into consideration

WACC

Retaining earnings _____ _____ if we can earn more than the cost of capital (r > k)

adds value

Cap rate is _____ discount rate when cash flows are expected to shrink or decline over time

greater than the

Higher delta = Lower ____

growth

____ is a measure of the ratio between the net operating income produced by an asset (usually real estate) and its capital cost (the original price paid to buy the asset) or alternatively its current market value

capitalization rate

_________ is used to turn a recurring cash flow amount into a lump sum value

capitalization rate

Higher _____ → Less option value

cash flow yield (delta)

Analysts generally view EBITDA as a

crude measure of a firm's cash flow

Leverage BuyOuts are predominately financed with what?

debt

Underwriters like to price IPO at a _____

discount

the cap rate has the same function as what other rate?

discount rate

Venture capital investors (private equity) value "hoped-for" cash flows by implementing high _________ to account for the high _____ and __________ of these investments

discount rates risk and illiquidity

p and 1-p are the hypothetical probabilities to make forward price _______ expected oil price next year

equal

Cap rate is _____ discount rate when cash flows are expected to stay unchanged over time

equal to the

LBOs represent a business acquisition strategy whereby an investor group acquires all the _____ of a firm and assumes its _______

equity debts

The fundamental source of value of real options comes from optimally utilizing _______

flexibility

Real option value is derived from value of the ______ which is affected by generated _________ (rather than primarily from asset appreciation)

investment cash flows

Projects that have flexibility (i.e., can be implemented in stage, are more liquid, or have "strategic value") should have ______ hurdle rates

lower

The VC is willing to provide financing at a _______ rate of return if the VC has the option to pull out of the business

lower

Cap rate is _____ discount rate when cash flows are expected to grow

lower than the

Capital Markets promote greater _____________ and produce higher ______________

market efficiency economic growth

Investments with higher operating leverage (fixed costs) will experience ____ volatility in operating income in response to changes in revenues

more

Terminal Value often represents ______ than 50% of enterprise value

more

More _____ → More option value

risk

Forward prices are often used to calculate "certainty-equivalent" cash flows which are discounted at the _____ ______ ____

risk-adjusted rate

Private Equity hurdle rates are high due to very ______ investments and ______ liquidity

risky low

Venture capital is typically exchanged for _____ in the invested firm

stock

EBITDA multiple and Gordon growth model should generate similar _______________ estimates when there are NO extraordinary capital expenditures or investments in net working capital

terminal value

Private Equity firms focus of the valuation is on the firm's _______ ________ (a multiple of EBITDA)

terminal value

If I start having a positive growth rate, what happens to the cap rate and discount rate?

the cap rate is smaller than the discount rate

What is the most widely used valuation metric in commercial real estate?

the capitalization rate

The cap rate is determined by _____ and ___

the discount rate (riskiness) and the growth rate

The difference between the discount rate and the capitalization rate increases with _____

the growth rate