INFLATION: other hand, is a cash flow cost that's best paid as late as we can.

other hand, is a cash flow cost that's best paid as late as we can. This way we can keep the cash in the bank as long as possible
An Australian-owned company produces milk in New Zealand and exports all of it to China. If the price of the milk increases,
China CPI increase
High econ growth -> High inflation. Constant prices are the same as real prices.
Current prices are the same as nominal prices. Real returns approximately equal nominal returns less the inflation rate.
If your nominal wage grows by inflation, then your real wage won't change because you will be able to buy the same amount of
goods and services as before. Interest rates advertised at the bank are nominal term.
The low interest rate on the HECS loan advantages all domestic students, not because they are able to pay off their debt sooner and
avoid paying as much HECS interest, but because the low interest rate makes education cheaper. It's a subsidy. Nobody is
advantaged by paying off their debt sooner and avoiding HECS interest.
Gold pays no income cash flow, real total return of 0, real income return of zero, nominal income return of zero.
The Highest perpetual real growth rate of dividends (g) that can be justified is Real GDP Growth rate.
The statement 'my shares rose by 10% last year' suggests that the nominal capital return was 10% pa over the last year
WACC BEFORE TAX Decrease if: the firm's industry becoming less systematically risky, for example if it was a child care
centre and the government announced permanently higher subsidies for parents' child care expenses.
OTHER:
Lease (debt displacement) The only important impact that more leasing (and more debt funding) will have on your valuation
(besides interest tax shields) is that it will boost your equity's systematic risk, giving a higher beta on equity. This will drive up the
required return on equity. But this will not affect the beta of assets if the assets remain the same as before.
The 'time value of money' is most closely related to opportunity cost concepts
a house in Sydney Australia is approximately equal to the gross weekly rent times 1000: Price to Revenue multiple.
The cash cycle is measured in days, the lower (even negative) the better. The cash cycle represents the time that money must be
invested or ‘tied up’ in inventory. The cash cycle is the time between the inventory payment date to the supplier and cash receipt
date from the customer.
Debt funding creates tax shield for company.
Accountant calculate the annual interest expense of a fixed-coupon bond that has a liquid secondary market by: the bond's market
price at the start of the year multiplied by its annual yield to maturity.
NPAT or NI or earnings gives the smallest measure of profit for a firm that has positive earnings
EV / Sales can NOT be negative for a corporation
Firms in a declining industry with very low or negative earnings growth tend to have low forward-looking price-earnings (PE)
ratios, only consider firms with positive PE ratios.
CapEx is subtracted from CFFA to account for the net cash spent on capital assets
A stock's required total return will decrease when its Systematic risk decreases.
P/E Ratio:
For Shares of companies with a 100% payout ratio and no expected growth in earnings or dividends., the forward-looking
Price-Earnings Ratio (P0/EPS1) is equal to the inverse of the share's total expected return (1/rtotal).
A higher equity beta cause a stock’s PE ratio to be lower compared to the past
The PE ratio is very closely related to the perpetuity formula => PE ratios are not useful for valuing fixed maturity debt since its
cash flows do not go on forever => Fixed term bonds of listed public companies NOT suitable (anything with defined Maturity)
High forward-looking PE: Highly liquid publicly listed firms, temporarily low earnings over the next year but with higher
earnings later, Low discount rate from low level of systematic risk, Firms whose assets include a very large proportion of cash, high
growth tech firms, companies with a very large proportion of cash (low level of systematic risk-> low required return, making share
price high)
Low forward-looking PE: Illiquid firms, temporarily high earnings over the next year but with lower earnings later, High discount
rates from high levels of systematic risk, Firms in a declining industry with very low or negative earnings growth
Most suitable for PE valuation: A company with positive earnings that has comparable firms with positive earnings.
A firm pays out all of its earnings as dividends, has no real growth in earnings, dividends or stock price since there is no re-
investment back into the firm to buy new assets and make higher earnings. The dividend discount model is suitable to value.
The firm's revenues and costs are expected to increase by inflation. The firm has no debt. It operates in the services industry and has
few physical assets so there is negligible depreciation expense and negligible net working capital required: PE should equal the
inverse of the firm's nominal income return or firm’s real total return. Also equal the expected payback period of an investor who
intends to buy the firm's equity at the current price and lower than that of faster growing firms that pay lower dividends and re-
invest in themselves.
before it's paid as tax to the government.
PVGO and NPV: If CapEx and NWC increase and spent on positive (negative) NPV projects, CFFA will decrease, g will increase,
Value of firm increases (decreases) by NPV of projects. The project earns more (less) than rWACC, the required return, and PVGO
increases (decreases)
Volatile profit: Firms with LT fixed lease have more volatile profit cash flows over business cycle than firms with ST lease.
Risk free: The current 30 year federal government treasury bond rate
The cash flows from assets are the most important aspect of business project valuation since estimates can vary wildly from the
reality and net present values are highly sensitive to these cash flow inputs. This is one reason why marketing is so important,
because the marketers make the sales forecasts.
CASH FLOW PART:
Assumptions: Assume FFCF is used to find total Asset Value, not Enterprise Value, so changes in cash and marketable securities
are included. Change in ST borrowings are excluded since they are financing CF, we are assuming that the WACC that discounts
FFCF reflects all assets so it’s a weighted average of all interest-bearing debt and equity including those current liabilities
borrowings. Provisions are not included because even though bad debt expense has not happened yet, it would it the future so the
only difference is time value of money. Bonds are issued at par and coupon payment equals to IntExp. Assume the difference
between net and gross is that the net financing expense is the gross financing expense (interest expense) less any financing revenue
which is interest revenue from lending
CapEx: Non-current Assets (PPE): Intangibles: If increase, include the change in CapEx since they are Goodwill. If decrease, it’s
impairments, don’t include in CapEx. (remember to add back depreciation)
NWC: Don’t include borrowings or provisions.
Interest Expense: Finance Costs (net financing expense): use the one from the income statement since it will exclude principal
payments. For the cash flows to debt holders (DebtCF), use the one in the cash flow statement since it includes principal
repayments and new debt raisings.
Debt CF: Statement of Cashflow: Finance cost paid (usually negative) + Repayment (usually negative) – Proceeds from
borrowings (Usually positive). Cash paid for interest on long-term debt: in supplementary cash flow information: include when
calculate Debt CF
EFCF: Payments for share buyback (usually negative) + Div paid (usua neg)
1. Multiples approach: P/E ratios obtained from other comparable companies are not reliable or does not fully represent the actual
P/E ratio.
2. WACC method versus FCFE method: calculations regarding the debts, while WACC method derives the MV of equity by
taking FCFF minus Interest-bearing Debt in the current year, the FCFE method obtains the Market value of Equity by taking the
FCFF (levered) minus Debt CF in that year, however, in the calculation of Debt CF, the new debt issues are also taken into account,
which might be the reason for the deviation of FCFE from WACC method.
3. WACC method and FCFE method versus Multiples approach: volatile Debt to Value (levered) ratio. Since WACC and
FCFE work best when there is a target debt to equity ratio, the non-constant Debt to Value ratio may render both the WACC and
FCFE method less effective, which is the internal factor. On the other hand, the Multiples method is basically based on consensus
views of the market, which are external factors.

RELATED Q2: LAST PART

For growing firm (g>0) with constant D/V: Firm or asset reinvestment needs are HIGHER than equity reinvestment needs since
more debt funding will be required than debt payback.
Depreciation pay now: It's better to incur depreciation expense sooner rather than later because then you have lower taxable
income and pay less tax now. You'll pay more tax later when you have less depreciation and higher taxable income, but it's better to
pay less tax now and keep the money in the bank earning interest for longer before having to pay the money as tax to the
government. Ideally, assets should be instantly depreciated so that the minimum amount of tax can be paid now. Higher
depreciation expense leads to lower taxable profit and lower taxes. It may seem that depreciation expense is a cost that should be
paid as late as possible. But depreciation is actually a non-cash expense, it's an imaginary thing made up by accountants. Tax, on the