21 terms

CFA2 Equity

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Unsponsored ADR
Created without the company's involvement, traded through OTC pink sheets or PORTAL electronic trading
L1 ADR
Company does not comply with SEC registration and reporting requirements. Shares traded only on OTC, but not NASDAQ. May raise capital in private placement rule 144A, from QIBs, no retail sector.
L2 ADR
Company registers with SEC, complies with reporting requirements eg Form 20F and reconciliation to US GAAP. Shares can be listed on US stock exchange like NYSE,ASE,NASDAQ
L3 ADR
ADRs traded on stock exchange, and company may raise capital through public offering of ADRs.
factors that affect industry pricing practices
The four factors that affect industry pricing practices are product segmentation, degree of industry concentration, ease of industry entry, and price changes in key supply inputs.
Synonyms of Residual Income
abnormal earnings, economic profit. discounted abnormal earnings model. Edwards-Bell-Ohlson model
Formula for Economic Value Added
EVA = NOPAT - (C% * TC)
Accounting adjustments for EVA
- R&D expenses are capitalized and amortized rather than expensed (i.e., R&D expense is added back to earnings to compute NOPAT)
- In the case of strategic investments that are not expected to generate an immediate return, a charge for capital is suspended until a later date.
- Goodwill is capitalized and not amortized (i.e., amortization expense is added back in when calculating NOPAT, and accumulated amortization is added back to capital).
- Deferred taxes are eliminated such that only cash taxes are treated as an expense.
- Any inventory LIFO (last in, first out) reserve is added back to capital, and any increase in the LIFO reserve is added in when calculating NOPAT.
- Operating leases are treated as capital leases, and nonrecurring items are adjusted.
Market value added
MVA = Market value - Accounting book value of capital
Computation of residual income per share
The per-share residual income in period t, RIt, is the EPS for the period, Et, minus the per-share equity charge for the period, which is the required rate of return on equity times the book value per share at the beginning of the period, or rBt-1.
IRR
Equates the discounted cash flows to the current price; same as required return in an efficient market
Mispricing
Can lead to a return from convergence to intrinsic value
Equity risk premium
Return over the risk-free rate. Required return [r] = risk free return [rf] + Beta X Equity risk premium
Historical estimate of ERP
Mean return on equity-market index - mean return on US T-bills over time period
Pastor-Stambaugh
Fama-French model + liquidity factor. The Pastor turns liquid water to wine.
Fama-French model
r[required return on stock j] = RFR + B;mkt;j X MRP + B;smb;j X small-cap risk premium + B;hml;j X value risk premium
build-up methods, unlike fama-french or P-S
do not use betas to adjust for the exposure to a factor
NOPAT in terms of EBIT and others
NOPAT = EBIT X (1 - TAX) = (S - COGS - SG&A - D) X (1 - TAX). D should be ECONOMIC, not accounting obsolescence
EVA expanded
EVA = NOPAT - $WACC = EBIT X (1-t) - WACC X C
LNOPAT
LNOPAT = NOPAT + t X Interest [t X Interest = yearly tax subsidy for a levered firm. already reflected in $WACC through reduced cost of debt financing]
$WACC tax subsidy
$WACC tax subsidy = t X (Pre-tax debt cost) X Debt [pre-tax debt cost = interest expense / debt]