Re = rf + B ( MRP)

ALTERNATIVES TO EVALUATE MRP

If we don’t have MRP as the data is not available then

1 - = MRPmm + country default spread

Mature rquity market premium – USA S&P 500

2- Relative equity market premium

MRP mm

MRP OF THE MATURE MARKET

MRPmm (. Std of the host equity market / std of mature equity market )

3- country default spread ( std of equity of host/ std deviation of the debt of the host )

4-implied equity risk premium

In some scenarios there is no change the in market however there is changing in the market
condition. Either the risk apetitie of the country is different or secondly ( 1+ r) r values start
decreasing

MV = CF1/(1+R) + CF2 (1 + R)^2 + CF3 (1+R)^3 in these situation when the R value starts
decreasing then due to better situation therefore we can see the

Implied equity premium id the only forward looking, this is the only measure.

Market risk premium once plug it back how are things going to change with these . If they
are not in the same position as you are.

Class number 4

BETA = BUSINESS RISK + FINANCIAL RISK

FINANCIAL RISK IS MEASURED THROUGH – FINANCIAL LEVERAGE + OPERATIONAL

LEVERAGE

MEASUREMENT OF BETA = HISTORICAL

FUNDAMENTAL
PURE PLAY APPROACH BOTTOMS UP BETA
FUNDAMENTAL BETA ( pure play approach )

1st step is Comparable companies

2-calculate the levered betas of the comparable companies
3-unlever the beta using D/E
4-Average the unlevered beta
5- Re lever using the Beta of the company you are valuing

What weights you be using to calculate company beta while you have various different
divisions ( FOR THE WEIGHT ALLOCATION YOU CAN USE P/E RATIO AND USE IT AS MULTIPLE
)
FOR EXAMPLE, IN CASE OF MARRIOT THERE WERE THREE SEAPARATE DIVISIONS

wEIGHTS – REVENUE BASED WEIGHTS FOR EACH DIVISION YOU CAN USE IT AS
2- VALUE BASED WEIGHTS ( HOE THE MARKET IS GOING TO WEIGHT )
3- Enterprise value / sales for calculating the market value of each division

For calculation MRP

1- Equal exposure approach

RFR + B ( MATURE MARKET PREMIUM + COUNTRY RISK PREMIUM )N

MATURE EQUITY MARKET PREMIUM * STDV OF LOCAL EQUITY /STDV OF MATURE

EQUITY MARKET

STANDARAD DEVIATION IS THE STANDARAD DEVIATION OF THE MARKET

2- RFR + MMP + B ( CRP ) if the company is based in the country

3- RFR + B ( MMP) + lamda ( CRP) if the cross country revenues are for company
How do you estimate lambda
Lambda is based on the revenues and exposure revenues from country/ overall
total revenues

Cost of equity models become complete

Next topic

Weighted Average Cost of capital

WACC = WeRe + Wd Rd
How to calculate cost of debt
Rd =
Weights we calculate market value of equity ( value of equity/ number of shares )
Weights we calculate for the debt ( as we saw the method for calculation )

How to calculate cost of debt

Estimating the Cost of the Debt

Cost of the debt

IF NOT RATED
DEBT RATING
YTM APPROACH AND NO PUBLIC
APPROACH
TRADED BONDS

Estimate
Use interest on
synthetic rating
bank debt

YTM – is the current proce of the bond is equal to present value of the all cashflows
of the bond

Debt Rating approach kd= (RISK FREE RATE +DEFAULT SPREAD) * (1-T)

HOW IS DEFAULT SPREAD CALCULATED MOODYS

GEORGE SOROS FINANCIAL MADE 1 BILLION DOLLAR AND HAD THE BANK OF
ENGLAND BANKRUPTED

For credit rating Altman z scores

Interest coverage ratio for privately held company

Interest coverage ratio= EBIT/ INTEREST EXPENSE

Should we include both the short term debt and long term debt in the cost of debt
 Cost of preferred stock
Rps it is quite simple to calculate and this is the third form of the capital.
Other forms of the capitals
4- Convertible
You have to treated as equity as well as debt , depending on the weight of the
convertibles.

We will use the market value of the weights

1) Weight – weight of the equity

2) We= E/D+E
3) For private companies we can you the multiples ,

Example

Commercial paper 528 528

Medium term paper 0
Senior convertibles
Other Us denomination Debt
Privately Placed debt
Euro Medium term Debt
Preferred stock
Cap cities debt

How to calculate the market value of the convertibles ?

Market value of the convertibles you need to find the weight of the equity and the
weight of the debt and then

Article -Tech titans tries to dazzle with the jargons but just lack substance

Class 6

Cash flow perspectives are governed by the accounting statement

How to value a tech company in the future
 Your income statement

Operating
Financing
Investment

How to we calculate the value of unlevered firm , if the Debt/ equity value is changing
then it will change
- Adjusted present value approach
Value of unlevered firm + value of tax shield – cost of debt ( distress)

- Value of unlevered firm

As if the company has no debt , you take the net income and then remove the
interest part from the income statement

Unlevered cash flows will be discounted to unlevered cost of the equity

When do you have to value the company you need to classify that what

Look into the accounting numbers , perspective of the valuation take the number (
valuations & future projections

1) Net income + depreciation -capex – changes in networking capital

2)

Bf2 21 -march-2019

DiSCOUNT RATE ESTIMATION

CASHFLOW ESTIMATION

FORECASTING – GROWTH RATE –

CF1(1+G)/(1+R)^1 + CF2(1+R)^2-----------------(CFR+1)/(R-G)/(1+R)^N

1) STABLE GROWTH RATE ASSUMPTIONS,

( GDP GROWTH RATE , FROM HIGH GROWTHR RATE TO STABILITY) IT WILL BE
MORE OR LESS SIMILAR TO THE GDP

ESTIMATION OF THE GROWTH

 1) HISTORICAL GROWTH RATE ( FOR A SMALL COMPANY IT IS NOT THE BEST
ESTIMAT, BUT FOR THE LARGE COMPANY IT MIGHT BE MUCH BETTER )
2) MANAGEMENT ESTIMATION
BEATING THE ANALYST FORCAST
3) ANALYSTS ---
4) FUNDAMENTAL GROWTH ( best way is to predict on the fundamental growth
rate)
( how much money you are reinvesting ) how well you are utilizing

Utilization --- efficiency

Same utilization and same efficiency for two company’s same growth rate
Difference in the growth rate
Efficiency is the one time thing
Long term growth you need reinvestment, perpetually you can’t do it without growth.

Reinvestment--- INTERNAL SOURCES , EXTERNAL, OR DEBT – WHETHER IT IS EPS GROWTH

RATE
RETENTION/EQUITY OFFERING
EFFICIENCY – ROE OR ROC

WHY SHOULDN’T YOU FOLLOW ANALYST

1) TUNNEL VISION ( SO MUCH FOCUSED THAT LOSES OVERALL FOCUS) ONE INDUSTRY
2) Mr jackel and mr hide
3) Fairness opinion
4) The

There major reasons for why I would like to work for Jotun is my thought process and goals
are aligned with the company. Moreover, my values are very similar, integrity and morality
has been a very integral part of my life.
The reason, I would love to work as area sales manager role is first my obsession of helping
people and businesses to do more and to be more. During my time at university we had
limited knowledge of digital platforms, but I made a Facebook page for small businesses
around me so that they can sell the products and services directly to customers. After that
when I joined Microsoft in sales department, I spend considerable time knowing future
trends, analysing customers. Later I developed partner network and increased the sales by
131%. That really inspired me and motivated. Customer obsession and going out of the way.
Moreover, my interest for digital marketing really motivates me aligned with my passion for
sales.
High growth market
Tech company
80% from flash memory
Competitive industry
N/P balance very high
Rapid R&D
A/C MATURE BY MATCHING IS NOT
PROFIT MARGIN IS LOW
SHORT PRODUCT LIFECYCLE
WC REQUIREMENT CAN BE HIGH
CASH FLOW PROBLEMS

Issues

Investing options

Financing options

Survival dynamics, survive profitability, how many additional resources to make this
company work .
Majorly it is a investing options ,

Problem definition
Your complete focus should be on the problem definition.
The concept of the sunk cost is very important for the project .

1) Problem identification
2) Feasible or not feasible , consolidation issues
3) Is the project really feasible or not

Dividend policy

How should be the companies dividend policy be like

-cash dividend
-stocks
-share repurchase

- High dividend is
- Future growth
 - Types of investors
- Signals in the market

iF THE FRICTIONS IN THE MARKET ARE NOT THERE , THEN IT DOESN’T MATTER IF YOU
HAVE THE MONEY OR NOT. THERE WILL BE SOME VALUE THAT WOULD BE LOST BUT STILL.
THE
TAX RATES FOR THE CASH DIVIDEND AND SHARE REPURCHASE WOULD BE QUITE
DIFFERENT
- BECAUSE IT WOULD BE CAPITAL GAIN IN THE SHARE REPURCHASE
- INCOME TAX WOULD BE JUST CASH DIVIDEND
-

Frictions
In terms of the dividend policy , tax impact and the
Signals are very important in the market
You need to know your customer that what are there preference for customers whether
they are looking for the future growth or the other . Different type of investors
1- Institutional investors
2- Normal investors and then high networth investors.
Normal high networth clients are

New chapter
 Exchange rate
 Interest rate
 Inflation

Some terminologies we need to be familiar with

- Spot rate
- Spot exchange rate
- Forward trade
- Forward exchange rate
- Future spot rate
- Swaps interest rate swaps and currency swaps
- LIBOR London interbank rate

American depository receipt, local currency changes = 5000 ADR

Cross rates 1USD=140PKR

1RMB

1-TRAINGULAR ARBITRAGE
1USD=100PKR
INFLATION 10%
INFLATION US =0%
EXCHANGE RATE
PURCHASING POWER PARITY
E(S) = S(1+(INFLATION PK -INFLATION US )

aRBITRAGE OPPORTUNITY

1USD = 2GBP
F1= 1USD= 1.9GBP

RGB=5%.
Rus=10%her equation

fisc

Rpkr-Rus=
Rpkr

Fischer equation = (1 + i) = (1 + r) (1 + π)

Where:

i – the nominal interest rate

r – the real interest rate

π – the inflation rate

However, we can also see the approximate version of the previous formula:
i≈r+π

F1= So (