Describe the Basic Idea of the DCF
Taking into account the time value of money the present value of future cash flows is calculated.
Cash flows and their respective cost of capital need to be calculated before (vielleicht gute Klausuraufgabe)
Give the formula for the DCF Method and give an example
Value is for Period 0, not 1!!!
What two methods exist for taking into account the infinite lifetime of a company?
The Terminal value assumes an infinite life of the company!!
How is the Terminal Value being calculated? What is its assumption?
Assumption: Since the company’s life does not end, it assumes Clash Flows are infinite.
Give a brief summary about the relevance of the Terminal Value
-> large cf typically occurs in the far future
How can Cash Flows be calculated?
-> indirect is the most common one
What definitions of Cash Flow can be distinguished?
Three types of cash flows are usually used in financial reports: Operating CF, CF From investments and CF from Financing
How can the CFE (Cash Flow to equity holders) be calculated?
Overview:
Step 1: Operating Profit (EBIT)
Step 2: Working Capital
Step 3: Free Cash Flow (Free CF)
Step 4: CFD (Cash Flow to Debt)
Tax deductibility of interest (Tax shield)
The tax shield is an instrument by governments to incentivize investments. Therefore, investors receive back the tax they pay on interest payments.
Step 5: CF to equity (CFE)
How can the discount rate be estimated?
How can the Cost of Capital be estimated?
Capital Asset Pricing Model (CAPM)
Estimates opportunity costs of equity based on:
Risk free rate (e.g. 10 government bond)
Stock market risk premium (e.g. DOW Jones or DAX compared to risk free rate)
Company risk premium (Company risk premium (caused by systematic risk of the
company, which can not be diversified)
Key assumptions:
Efficient markets (all information are priced; reflected in prices)
Fully diversified portfolios (no unsystematic risk left; only company specific risk)
No arbitrage conditions
Formula:
Explain the CAPM Paramenters in detail!
Beta describes the systematic risk by expressing quantitatively the volatility of a company’s stock to changes in the entire market.
How can Beta (ß) in the CAPM model be calculated?
Differentiate leveraged and unleveraged Beta.
In case of insolvency debt holders get paid first. Hence, equity holder’s risk depends on the
amount of debt in a company. The Debt Equity Ratio has to be considered when calculating
the beta factor of one company based on a peer group.
Give examples of average Betas in different industries!
For new ventures, it is difficult to calculate the cost of capital since there are no peer-groups for benchmarking and orientation.
A peer-group can be defined by research on comparable companies or by industry-betas.
How do Cost of capital develop in young technology ventures?
What DCF Models exist?
Describe the Equity Model in detail!
The Equity Model relies on CFE and the cost of equity.
Explain the WACC model in detail!
The WACC Model relies on FCF and the WACC as well as the PV of debt.
How can multi-business companies be evaluated?
A company’s present value comprises the present values of all its units.
Compare the Equity Model and WACC Model
What are advantages and disadvantages of the Equity Model?
What are advantages and disadvantages of the WACC Model?
Evaluate the Discounted Cash Flow Valuation regarding the new Venture Specifics!
Flexibility: there is non because if things change you would have to recalculate the whol financial structure
-> widely used in somewhat established, not so new companies
-> typically, Start-ups do not have so many unutilized assets
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