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