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MindMap Gallery CFA Level 2 Review-Equity

CFA Level 2 Review-Equity

CFA Level 2 review notes for 2105. Mainly the big framework and the formulas that need to be memorized. They are all compiled based on personal understanding of the teaching materials. You can add or delete them according to your own review situation. I hope it can help you clarify your knowledge and improve your learning efficiency. I wish you all good luck in the exam~ For your reference, I hope you can get on board as soon as possible!

Edited at 2021-05-31 15:48:47

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CFA Level 2 Review-Equity

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Outline

equity investment

capital cost

RP=rm-rf

historical estimates

Use historical data to estimate

Advantages: Objective, simple, unbiased

Disadvantages: Assuming constant mean and variance of returns; survival bias

forward looking estimates

gordon growth model

RP=D1/V g-rf

Advantages: popular

Disadvantages: D1/V needs to be updated frequently; assuming constant growth rate

supply side estimates

RP=(1 i)(1 reg)(1 peg)-1 Y-RF

i→expected inflation

reg→expected real growth in EPS

peg→expected growth in P/E

Y→expected yield on index

RF→expected risk free rate

Advantages: proven model; current information

Disadvantages: only applicable to countries where the equity market accounts for a large proportion of the overall economy

survey estimates

Questionnaire

CAPM

listed company

re=rf β(rm-rf)

adjustedβ=(2/3*regressionβ) (1/3*1)

non-listed company

β has leverage = β has no leverage (1 D/E)

country risk

SYS = Treasury bond yields of developing countries - Treasury bond yields of developed countries

CRP (country risk premium)=SYS*σdeveloping country stock market/σdeveloping country bond market

re=rf β（rm-rf CRP)

multifactor model

FAMA french model

Re=Rf β(Rm-Rf) βsmb(Rsmall-Rbig) βhml(Rhbm-Rlbm)

Re=Rf 2 risk premium

Large Cap Small Cap Stocks

value growth stocks

Pastor Stambaugh model

Re=Rf 3 risk premium

Large Cap Small Cap Stocks

value growth stocks

fluidity

macroeconomic multifactor model

Re=Rf 5 risk premium

confidence risk

time horizon tisk

inflation risk

business cycle risk

market timing risk

build-up method

Re=Rf 3 risk premium

equity risk premium

size premium

specific company premium

Bond Return Risk Adjustment Model

re=rd risk premium

The premium is usually 3%-5%

Valuation method

Listed company valuation

absolute valuation

discounted dividend valuation

Ordinary DDM

Multi-stage model: V0=D1/(1 r)^1 D2/(1 r)^2 ... (Dn Vn)/(1 r)^n

Preferred stock model: V0=D/r

GGM

hypothesis

g constant

n→∞

r>g

formula

V0=D1/(r-g)

g=ROE*b

1=b dividend payout ratio

shortcoming

Very sensitive to g and r

Not applicable to companies that do not pay dividends

Dividend growth is difficult to predict

Two-stage DDM

H model

advantage

shortcoming

Difficult to use when no dividends are issued

Analysis from the perspective of minority shareholders

Scope of application

Has a history of dividend payment

Dividend policy is clear and earnings-related

From the perspective of minority shareholders

free cash flow valuation

CF method

dividend cash flow model

∑div/(1re)^t

equity cash flow model

∑(CFF-D)/(1re)^t

Equity CF=net profit-net investment in equity=NI-△Net operating assets*(1-debt ratio)=NI-(△WC CAPEX-DEPAM)*(1-D/A)

Debt CF=INT-△D

Entity CF

=Equity CF Debt CF

=NI-△Net operating assets

entity cash flow model

∑(CFF)/(1 wacc)^t-∑(D)/(1 rd)^t

Assets = operating assets financial assets

Liabilities = operating liabilities financial liabilities

Operating liabilities are generally interest-free; financial liabilities are generally interest-bearing

Net operating assets = operating assets – operating liabilities = net liabilities Owner’s equity = working capital Net operating long-term assets

Net operating long-term assets = capital expenditures - depreciation and amortization

Net operating assets Net investment = δ Working capital CAPEX-DEPAM

Net liabilities = financial liabilities – financial assets

advantage

Available to most companies

Analyze equity value from the perspective of controlling shareholders

shortcoming

Not suitable for companies with negative free cash flow

Scope of application

There is no history of dividend payment or dividends have nothing to do with profits

Free cash flow is related to company earnings

Applicable to controlling shareholders

residual income valuation

residual income

RIt = NIt-Et-1*re = Et-1 * (ROE-re)

economic value added

EVAt=NOPATt-WACC*At-1

market value added

MVA=MVcapital-BVcapital

Limited period RI model

V0=E0 RI1/(1 r)^1 RI2/(1 r)^2 ... RIn/(1 r)^n

Indefinite RI model

first stage

V0 = E0 RI1/(r-g) = (ROE-re)E0-(r-g)

second stage

V0 = E0 PV pf interim high-growth RI PV of continuing RI

ω=1

PV pf cotinuing RIt-1 = RIt/r

ω=0

PV pf cotinuing RIt-1 = RIt/(1 r)

0<ω<0

PV pf cotinuing RIt-1 = RIt/(1 r-ω)

RI gradually reduces to industry average

PV pf cotinuing RIt-1 = (Pt-Et RIt)/(1 r)

advantage

Applicable to companies with negative free cash flow or no dividends

E0 accounts for a large proportion and has little impact on the final value.

Financial data is easy to find

Based on economic profits, not accounting profits

shortcoming

Financial statements can be easily manipulated

Financial data needs to be adjusted

May not satisfy clean surplus relation

Scope of application

No dividends

Future free cash flow is negative

Transparent financial statements and high quality earnings

The final value is difficult to estimate

relative valuation

PE,PB,PS,EV/EBITDA

P/E

justified trailing P/E (corrected P/E for the current period) = (1-b)(1 g)/(r-g)

justified leading P/E (corrected expected P/E) = (1-b)/(r-g)

Advantages and Disadvantages

P/B

justified P/B = (1-b)ROE/(r-g) = (ROE-g)/(r-g)

Advantages and Disadvantages

P/S

justified P/S = E1/S1*(1-b)(1 g)/(r-g) = E1/S1*justified trailing P/E

Advantages and Disadvantages

dividend yield

justified trailing D/P = D0/V0 = (r-g)/(1 g)

justified leading D/P = D1/V0 = (r-g)

P/CF

1. NI DEPAM

2. CFO

3.FCFE

4. EBITDA

EV/EBITDA

EV = MV of (common stock preferred equity debt) minority interest - cash and equivalent

EBITDA = EBIT DEPAM

Unlisted company valuation

Valuation method

asset based approach Suitable for start-up companies

MV of firm equity = MV of assets - MV of liabilities

Applicable situations

Companies that do not meet the going concern assumption

Banks, real estate investment funds

Early stage companies, natural resource companies

income approach Suitable for companies in the growth stage

Two-stage FCF model

capitalized CF method

Vfirm = FCFF1/(wacc-g)

RI method/EE method

EE = NI -required earnings of working capital - required earnings of fixed asset

Vfirm = value of FC value of WC value of intangible assets

The value of intangible assets is the discounted value of EE

market approach Suitable for mature companies

1. When using the price multiplier of listed companies, it is usually necessary to adjust the control premium

2. Based on similar past M&A transactions, there is no need to adjust the control premium

3. Based on the historical price at which the company was acquired in the past, for example, Series B financing refers to the price of Series A financing

Adjustments to financial statements of unlisted companies

1. normalized earnings

Remove accidental factors and excessive management compensation

Remove expenses that are overstated to pay less tax

Remove income and expenses generated from non-operating real estate

2. strategic and nonstrategic buyers

Strategic acquisitions will create synergies, financial acquisitions will not.

3. estimating cf

Less dividends, DIV is not applicable

Financing structure continues to change, FCFE is not applicable

clean surplus relation is not established, RI is not applicable

lever

DLOC

Discount for Lack of Control

=1-(1/(1 control premium))

DLOM

Discount for Lack of Marketability

total discount = 1-((1-DLOC)(1-DLOM))