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Modigliani-Miller with tax Value VS WACC

MM Preposition I

  • Value does change because of the tax shield of debt. Value is maximized when debt is 100% of capital structure.

MM Preposition II

  • WACC does change because of the tax shield of debt. WACC is minimized when debt is 100% of capital structure.

When volatility increases, option price ____ and OAS ____.

The option price/value increases with volatility and the Option Adjusted Spread decreases.

Remember:

Z-Spread = OAS + put option cost

Z-Spread =OAS – call option cost

Is a lower or higher M-Score better?

An M-Score less than -2.22 suggests that the company is not an earnings manipulator so lower is better and an M-Score below -2.22 is best.

A high M-Score indicates earnings manipulation is being undertaken.

Is a lower or higher justified PEG ratio better?

The lower the PEG ratio the more then stock may be undervalued.

The higher PEG ratio stock is less able to justify its P/E ratio relative to its implied growth rate.

A broad rule of thumb is a PEG ratio less than one is desirable.

The Cost Approach to Real Estate Valuation

  1. Estimate the market value of the land.
  2. Estimate the building’s replacement cost including builder’s profit.
  3. Deduct depreciation including physical deterioration, functional obsolescence, locational obsolescence, and economic obsolescence.

Use the cost approach for relatively new properties, unusual properties, or properties with few comparable transactions.

In structural models of credit the probability of default is equal to:

The probability that the company’s asset value falls below the face value of the debt and the loss given default is given by this shortfall.

The equity is viewed as a European call option on the company’s assets.

How to calculate annualized Swap Rate (from quarterly data)

You’ll be most likely given four interest rates or discount factors.

Maturity Annualized Rate Discount Factor
90 R1 1 /(1 + (R1 * (90/360))) = Z1
180 R2 1 /(1 + (R2 * (180/360))) = Z2
270 R3 1 /(1 + (R3 * (270/360))) = Z3
360 R4 1 /(1 + (R4 * (360/360))) = Z4

C = (1 – Z4) / (Z1 + Z2 + Z3 + Z4)

Assuming quarterly date Annualized Swap Rate = 4C or C/(90/360)

In order for a firm to claim compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct they must state:

Firm Name claims compliance with the CFA Institute Code of Ethics and Standards of Professional Conduct. This claim has not been verified by the CFA Institute.

The CFA Institute’s Research Objectivity Standards require analyst compensation not be tied to?

Investment Banking or Financing Activities

It should be based on the accuracy of recommendations over time.

Analyst compensation can also be tied to the performance of the entire group/firm.

The CFA Institute Research Objectivity Standard ____ the accuracy of reports and recommendations.

Cannot Ensure

Actual events will often differ from forecasts on which investment recommendations are made.