I.

II.

The valuation process a. Identify the companys direct, indirect, and potential competitors b. Analyze historical performance, strategy, and sources of competitive advantage c. Calculate the value of the firm and equity using a discounted cash flow or excess flow method i. Forecast relevant FCF or excess flows and financial statements ii. Measure the business risk of the company and the relevant cost of capital d. Calculate the value of the firm and its common equity using market multiple valuation methods i. Using publicly traded companies ii. Using comparable transactions e. Consider alternative valuation methods, e.g. LBO Creating and measuring value: value comes when a company earns above their risk-adjusted rate of return. a. Value comes from two sources i. Industry-wide factors (porters) or competitive advantage. b. FCF of the unlevered firm i. Represent the cash flows available for distribution to all of the firms claimbholders, after making all required investments in the business, but excluding the tax savings from interest. 1. Tax savings excluded bc we will account for the financial strategy later, by valuing tax savings in the discount rate or separately. c. Porters 5 forces

III.

i. Extend Porters: what is the competitive advantage?? a. Cost Leadership b. Product Differentiation 2. Is it sustainable?? 3. How to challenge a competitor who has a competitive advantage a. Product price reductions b. Product innovations c. Product delivery innovations d. Lower production costs e. Imitation Analyzing Financial Statements a. Primary uses of ratio analysis i. Gain a general understanding of firm & industry

ii. Forecasting iii. Choosing comps for market multiples iv. Choosing comps for estimating the cost of capital v. Bank covenants vi. Compensation contracts b. Decomposing ROE i. ROE = [NI-pref. div.]/ Avg. Common Equity = [(NI-pref.div.)/Revenues]*[Revenues / avg. Total assets]*[Avg. Total assets / avg. common equity] = profit margin * asset turnover * leverage ratio ii.

IV.

FCF Basics and the statement of cash flows a. Statement of cashflows i. Operating cash flows measure the cash flows produced by operations after interest and taxes, but before investments. ii. Investing activities indicate purchases and sales of long-lived assets. iii. Financing activities indicate transactions with the firms claimholders, except for interest payments. iv. CFO by indirect method

1. b. Unlevered FCF: cash flows available for distribution to all of a companys security holders. i. EBIT vs CFO

ii. FCF(CFO) = FCF(EBIT) 1. Understand that you can obtain the firms change in cash from the change in all noncash balance sheet accounts.

V.

Forecasting and creating a simple financial model a. Step 1: Forecast horizon, forecast drivers, aggregation level: go til steady state i. In practice, the midyear convention is quite popular 1. (end value)*(1+r)1/2 b. Step 2: forecasting revenues c. Step 3: forecasting operating expenses i. Operations vs excess assets: both included in value of the unlevered assets. ii. Required cash vs excess cash d. Step 4: structure of model e. Step5: checking model f. Step 6: reasonableness of model g. Step 7: forecast capital structure i. Interest is tax deductible

VI.

ii. Interest tax shields: for any period, it is equal to the interest expense multiplied by the tax rate applicable to interest. iii. Countervailing forces counteract interest tax shields 1. Financial distress costs, agency costs, personal taxes, usability of the ITS iv. Dilution effect of issuing stocks 1. Issuance does not lead to dilution; poor management decisions do. h. Step 8: reasonableness of model (II) FCF Measurement Issues a. Net Operating Losses i. US law allows the firm to carry the los back two years or to carry it forward 20 years. ii. How they work: The difference in the taxes levered and unlevered each year is the interest tax shield for that year.

VII.

iii. Effective vs federal tax rate. b. Equity-based compensation i. Adjustments 1. Adjust valuation for the equity-based compensation contracts outstanding as of the date of valuation. 2. Adjust FCF forecasts for the equity-based compensation contracts we expect the company to grant in the future. ii. Warrant (issued by company and has a dilutive effect) vs option (traded by 3rd party) iii. Option: 1. From issuance, amortize the deferred compensation over the vesting period. This is tax deductible. 2. The company needs to repurchase shares of stock so that it can reissue those shares to settle the equity-based compensation contract. a. Approximation: total effect of call option of FCF at exercise date is pretty much (1 taxrate)*(Sactual-Koption) b. Use option value at issuance as a cash compensation expense for a simple solution. c. Discounts and premiums on debt i. Firms seldom sell their bonds exactly at par. ii. If they issue the bond for less (more) than the face, the effective interest rate is higher (lower) than the coupon rate. iii. Accountants amortize discount or premium to zero over the life of the bond, which affects the effective interest expense. 1. In both cases, interest expense does not equal cash interest paid. a. Discount amortizations are added back to NI since interest expense = cash interest + discount amortization b. Premium amortizations are deducted from net income since interest expense = cash interest premium amortization. d. Post-retirement benefits e. R&D i. Expense legally, capitalized otherwise. APV and WACC discounted CF valuation models a. APV method

i. Value of the firm is obtained by discounting the forecasted FCF of the unlevered firm at the unlevered cost of capital (100% equity financed) adding the present value of the interest tax shields at the appropriate discount rate, rITS.

ii. What you need: 1. UFCF, ITS, discount rate for tax shields, CV of the levered firm or continuing value of unlever + continuing value of ITS. iii. Unlevered cost of capital, rUA: reflects the risk of CFs from the companys assets. Assume for now, that ITS have same risk as firms operations:

iv. APV easier to implement when debt amount is relatively constant, or at least predictable, because need to know the amount of ITS. b. WACC method i. Value of the firm is obtained by discounting the forecasted UFCF at the weighted average cost of capital:

ii. WACC: weighted average of the after-tax cost of each of the securities that the firm issues:

VIII.

iii. WACC is easier to implement if capital structure is realtively constant over the forecast period because . iv. WACC is less reliable when ITS varies over time due to NOLS bc effective IR is not constant. c. Valuing Equity i. = value of the firm minus market value of debt, preferred stock, and all other non-common equity securities. NOT current operating liabilities (eg AP) bc already incorporated into UFCF. ii. Discounted FCF to equity 1. Difficult a. Bc need to forecast the leverage ratio (to estimate the cost of equity capital: levering beta) and the actual magnitude of the debt (to estimate the FCFE: interest expense). Excess Earnings Valuation Method: algebraically equivalent to DCF a. Allows for a better understanding of the value created excess flow.

b. = c. To use the excess earnings valuation method, we discount excess accounting earnings instead of CF i. Over the life of a company, accounting earnings equal the CFs as long as accounting follows the clean surplus accounting.

ii. iii. The difference between CFs and earnings is accounting accruals. d. Excess earnings with debt financing i. Both APV and WACC formsf e. Unlevered earnings i. To compute, take NI and add back interest expense and then subtract off the ITS=NI+int*(1-T) f. WACC form: compute excess earnings based on unlevered earnings less the book value of total invested capital times the WACC.

g. APV form: compute excess earnings based on unlevered earnings less the book value of total invested capital times the unlevered cost of capital (& still add the value of the ITS separately.

h. TIC with leverage: would include interest-bearing debt, preferred stock, and common equity including retained earnings (also warrants and options if the firm has issued those). i. We can calculate TIC as the sum of the book values of the above claims or as total assets minus non-interest bearing operating liabilities such as AP, Accrued liabilities, etc. i. Equity excess earnings: i. Compute excess earnings based on earnings available to common equity (after preferred dividends) less the book value of common equity times the equity cost of capital. 1. NEED D/V!!! need estimate for Et, so need D, D/V, so need to know V.

j.

IX.

USES of the 3 excess earnings forms i. WACC form will be directly implementable when the firm pursues a target capital structure policy (constant D/V) ii. APV form will be implementable when the future amounts of debt that will be outstanding are known and managed independent of firm value. iii. The Equity form will not be directly implementable. Measuring Continuing Value using the constant growth perpetuity model a. Assuming constant growth and risk is a common method for estimating continuing value:

b. Choosing a CV date i. Need a base-year CF to be positive and expected to grow at a constant rate in perpetuity. 1. Tied to inflation and perhaps real population growth or real productivity gains. ii. Need a constant discount rate. iii. The base-year FCF should have the firm earning modest or zero returns in excess of its cost of capital, unless we think it has a competitive advantage that lasts forever. iv. The base-year FCF should imply a sensible long-run capex to depreciation ratio. c. Constraints on stable growth rate i. First growth < nominal growth of economy ii. A stable growth firm can generate a return on capital very close to industry average or cost of capital. iii. Expected growth rate of FCF should be close to: reinvestment rate * return on capital d. Present value weighted average growth rate (PVWAGR) i. A useful computation to summarize yoru assumptions about a company value is using PVWAGR; need to know the value of the firm and the base year cash flow has to be positive.

X.

Estimating the COST OF EQUITY a. Four methods to get equity cost of capital i. CAPM 1. rE=RF + Beta*MRP a. Beta: Shows how far up and down a security moves with the overall market. b. A measure of relative risk in a portfolio

c. The beta of a portfolio is just the weighted average of the betas of the portfolios securities. d. Implications: i. Market risk is all that is priced ii. Market risk based on co-movement of securitys return with return on the market. Idiosyncratic risk is not priced. e. Beta is weighted average of the betas of projects of the firm. 2. Steps in estimating COE using CAPM a. Decide which comparable companies to use to estimate cost of equity i. In same line of business ii. With similar operating leverage 1. But this can be adjusted b. Assesss stability of operating assets and capital structure of target company and comps c. Decide to use commercially available estimate for beta or develop your own d. Estimate beta of each companys common stock. i. Issues 1. Which index? 2. Monthly, weekly, daily? 3. Mow much data? ii. Betas tend to mean revert 1. Future beta: betai,2=.371 + .635*betai,1 2. Bloombergs: Beta=.33 + .67*beta iii. Betas move around 1. Equity betas can change bc of changes in operations or capital structure 2. Because of changes in the composition of the index over time and shifts in how a companys or industrys prospects change with the market. 3. Unlevered betas change for the same reason except for changes in capital structure. e. Estimate market risk premium i. Historical approach Overestimates the true MRP 1. Take arithmetic average difference in returns between S&P and total return on intermediate-term US Treasury bonds. 2. Issues a. Which index??? BE CONSISTENT; use the same one that was used for beta estimation. b. Which risk-free?? c. Time period for estimation?? Survivorship bias means that MRP estimates are too high if they goi back too far. f. Estimate risk-free rate i. Use yield of long term US treasury bonds (as of valuation date) whose duration is approximately the duration of cash flows to value. ii. Typically, use yield on 10-30 year LTGB for estimating Rf when valuing equity securities.

XI.

iii. BE CONSISTENT with what you choose for MRP. g. Substitute estimates in CAPM equation and solve for cost of equity capital ii. CAPM with size adjustment 1. This is disappearing 2. rE=Rf+ Beta*MRP + adjustment for size mispricing a. only an empirical finding. iii. Fama/French 3 factor model 1. rE=Rf+ Beta*MRP + Small/big coefficient*(small-big premium) + high/low coefficient *(high-low premium). a. Small-big premium is premium earned on small-cap stocks vs large-cap stocks based on difference in average annual returns between the two portfolios and high-low premium is the difference in annual returns between high book-tomarket and low book-to-market firms. iv. Dividend Discount Model 1. P = DIV/(rE-g) rE=g+DIV/P v. Private firms 1. No problem to use CAPM if private company being valued as public entity, but problematic if we want to value as private company. a. Normally value as public company, thenn apply a discount for non-marketability i. Restricted stock studies ii. Discounts of sales before IPO show median disconts of 43% to 66% depending on the study iii. Tax courts often allow discounts in the 35%-50% range Cost of Debt a. Depends on probability of default, recovery rate, and on general interest rates in economy. b. Estimating cost of publicly traded debt. i. Sometimes past returns are unreliable because so thinly traded. However, we can use credit rating and then assess standard yield for similar debt (same rating, same industry, and similar maturity). c. Promised vs expected yields i. Promised yield is the YTM. Does not incorporate expected default losses.

ii. YTM is not cost of debt: IT IS ALWAYS HIGHER THAN THE TRUE COST OF DEBT IF THERE IS ANY PROBABILITY OF DEFAULT. 1. The difference between YTM and the cost of debt is the expected default loss.

Estimated default losses (as % of YTM spread over US GB).

d. Possible ways to adjust YTM given credit rating i. Calculate the expected cash flows as we just did using data on cumulative default probabilities and recovery rates ii. Use historical data on the percentage of spreads that are expected default losses (above table) iii. Use the CAPM.

e. Remember, FORECAST cost of debt. Without credit rating, two ways to pick comparables i. Compare Ratios 1. Compare firms financials against credit rating statistics to get a sense of current debt rating. Changes in operations or capital structure can be anticipated and forecasted for any changes in capital structure and operations and compared to the rating statistics.

2. Use Debt rating models a. These models attempt to mimic the ratings of rating agencies. Yields are highly correlated with yields and default experience. b. Potential uses i. Can determine likely rating and yield on a private company. ii. Can determine likely rating and yield on a company thinking about changing capital structure and/or operations. 3. Preferred stock Yields

XII.

a. Preferred stock yields overstate the cost of capital if there is any chance of default. b. We can make similar adjustment to yields for preferred as we illustrated for debt. c. Differences are that non-payment of preferred dividends does not lead to default, but dividends in arrears must be paid before shareholders receive dividends. 4. Cost of capital for warrants, employee stock options didnt really go over this, but chp 13 if necessary. The Effects of Financial Leverage on the Cost of Capital a. Why lever and unlever? i. Sometimes we cannot estimate a companys cost of capital because it is private. Then we have to rely on comparable companies with different capital structures. ii. Sometimes we can estimate a companys costs of capital from tis own data, but we feel we can get more precise estimates of the cost of capital using comps. iii. Sometimes we want to ask what would happen to a companys costs of capital if it changed financial leverage. iv. Sometimes we are using the APV method and we need the unlevered cost of capital. 1. IN ALL THESE CASES, we have to lever (to find rE) and/or unlever (to find rUA). b. Everything comes from a single equation:

i. From this, one can isolate the equity cost of capital:

1. You can see that equity cost of capital is equal to the unlevered cost of capital plus a premium for each of the non-equity securities minus an adjustment for the existence of an asset that is sometimes less risky than the companys underlying business risk (i.e. ITS). ii. Choosing discount rate for ITS 1. Cost of debt a. Intuition: use cost of debt if firm has fixed schedule of debt amounts unrelated to firm value. Ability to use ITS mostly depends on whether firm can make required debt payments cost of debt incorporates that risk well 2. Unlevered cost of capital a. Intuition: use Rua if amount of debt is tied to firm value (e.g. managers pursuing constant D/V capital structure. c. Scenarios i. Perpetual debt (In the long run, it is unlikely that any companys debt level should be thought to be independent of firm value.) 1. ITS @ rd 2. ii. Continuous Refinancing

1. ITS @ Rua 2. a. NEITHER OF THESE TWO ARE THAT ACCURATE d. Assume part ITS discounted at Rd, part Rua. This leads to:

i. Perpetual debt 1. 2. ii. Continuous Refinancing 1. a. This is the same formula as if there was no tax deduction for interest (because return on ITS = return on unlevered assets). b. Even though the cost of equity capital does not depend on ITS in the continuous refinancing scenario, the WACC and resulting firm value are affected by ITS iii. Annual Refinancing 1. We know the amount of debt the firm keeps in first year at date of valuation. Hence, the risk of the first years ITS is given by the cost of debt at current time, but all future ITS have risk of unlevered cost of capital at current time:

e. Lever/unlever Betas

f.

WACC & ITS

i. No cost of equity appears in this expression ii. No expression for preferred stock b/c it is not tax deductible and gets canceled out iii. Only the value Vits@Rd will affect the WACC because it is less risky than UA whereas Vits@Rua is as risky.

g. Unlevering cost of capital

h. Unlevering Betas

i.

j.

Two common practicioner mistakes i. Assuming zero debt and preferred betas 1. Implies that firms can issue debt and preferred at the risk free rate of interest. ii. Abuses of the M&M levering formula: use perpetual debt on growing company.. 1. The formula is only an approximation for companies with low debt levels and very very slow growth. Financial Distress costs

XIII.

i. NOT incorporated into the calculated costs of capital. ii. Solution 1. For highly levered firms experiencing financial distress, you should try to use more highly levered comps. 2. For firms with more modest leverage and no financial distress costs, you should not use highly levered comps. Further cost of capital issues a. WACC: weighted average cost of capital (post taxes) i. Useful when valuing the entire firm assuming that the investment policy of the firm will not vary and D/V will be predictable. ii. Scale expansions iii. Estimation tips 1. The weights should be based on forward-looking market values 2. Debt weight should include short term debt like average balance of seasonal financing and off balance sheet financing, but exclude non-interest bearing operating liabilities, which are netted out when computing UFCF. iv. WACC problems that it doesnt handle well: 1. Effective interest rate at time of issuance doesnt equal the current cost of debt and the old debt isnt being retired immediately. Problem is that the interest deductions (and tax shields) are based on the effect rate of interest when the debt is issued. 2. Anything else that causes the timing of tax shields to differ from payment of interest or causes amount of deductible for tax purposes to differ from cost of debt. b. Interest Tax Shields Issues i. Financial Distress Costs 1. Vf=Vua+Vits-Vfinancial distress costs a. 0-20% of firm value, depending on capital structure and situation. b. Note: if costs of capital incorporate financial distress costs, we dont get them out through unlevering. Consequently, it is better to use comparable firms with the same level of financial distress as the company we are valuing. ii. Uncertainty of ITS 1. Expected marginal tax rate ~24%. iii. Personal taxes 1. Debt has an interest tax shield only if: a. 1-Tpersonal>(1-Tcorp)*(1-Tequity) 2. ITS less valuable than often assumed bc a. Financial distress costs reduce their value for aggressive capital structures b. Use of top marginal tax rates for some companies may be too high c. Personal tax issues may reduce their value. c. How to value a distressed Firm i. For a bankrupt firm 1. Equity value = 0 2. Debt value = whole firm 3. Firm value= Vd ii. If a firm loses a ton of money each year 1. WACC method should have no interest tax shield. iii. Valuation through simulations or scenario analysis are effective ways to value a distressed firm.

iv. Off balance sheet financing 1. Some leases are capitalized; meaning the present value of the lease payments is put on the books as an asset and a liability. The asset is depreciated and the payments are apportioned between interest expense and principal repayments. a. If we use comps to help estimate the companys cost of capital, we must make sure leases are all on the same basis.

XIV.

2. Summary a. Ve is not affected by the treatment of the leases b. UFCF are not the same under the two methods. c. Vf under the capitalized lease treatment is greater than the Vf under the operating lease treatment by the value of the capitalized leases. d. Rua is not the same!!! It is smaller under capitalized lease method bc it treats part of the fixed payment as a financing activity. Market Multiple Valuation Part 1: Introduction a. MM Overview i. MM are used to value firm or common equity ii. MM are used to assess current value as well as to estimate continuing value iii. Sometimes based on publicly traded companies or transactions b. Basic approach i. Value=Multiple*Firm characteristic ii. Value equity=P/E multiple * Earnings iii. Essentially, it is an attempt to adjust for scale, but the technique makes the strong assumption of direct proportionality of the value to the firms characteristic. c. Role of the market i. The market where the benchmark prices come from dictates value. 1. If you want to ask the question of what the market seems willing to pay for an asset, a multiple valuation can be informative.

d.

e.

f.

g. h.

i.

j.

k.

l.

2. This will include market bubbles and mispricings What drives variations in multiples: i. Mispricings ii. Growth iii. Risk iv. Reinvestment v. Profitability vi. Different accounting techniques vii. Controlling for size viii. Transitory shocks 1. Short term shocks to FCF, earnings, or some other denominator. Risk and growth i. Present value weighted average growth rate: g=r-FCF/Vf,0 1. We can then get the value of the firm as a growing perpetuity which gives rise to the price/FCF multiple: a. MM=V/FCF=1/(r-g) i. .: risk and growth are determinants of any multiple FCF multiples i. The problem with free cash flows is that, for many firms, investment is lumpy. Hence observed FCF are not based on some normalized amount of investment. This difference impacts growth rates. ii. In addition, FCF are negative for many firms. If the denominator is negative, you cant use it to value the firm. So.. not practical or popular. Revenue multiples i. Do not control for differences in operating costs EBIT & EBITDA multiples i. Partially, but not totally, control for differences in operating costs. At least, they control much better for these differences than revenue multiples. PEG ratio i. P/E divided by expected growth in earnings per share. Some say a PEG ratio significantly greater than 1 might indicate an overvalued stock wrong Enterprise or Firm Value i. Market value minus cash & securities. This implies that they assume that all cash is available to pay off debt (i.e. no required cash). Choosing COMPS i. Want to find comps in the same line of business and are similar in terms of: 1. Growth 2. Risk 3. Reinvestment requirements/profitability 4. Leverage 5. Accounting Techniques Continuing Value in DCF i. Continuing value should be consistent with the entity being valued. ii. Avoid using high growth multiples, which might be okay for now, iii. In cyclical industries, pick multiples from middle of cycle. iv. Multiples used for current valuation are different from multples for CV

XV.

XVI.

MM Valuation Part II: Implementation a. Valuation with MM i. Identify potential comparable companies 1. Business risk should be similar. ii. Collect historical and forward looking information for potential comps iii. Identify the characteristics of the company being valued that drive variation in MM 1. Risk, growth prospects, projected profitability, asset utilization, etc?? iv. Assess the comparability of the financial statements for the comparable companies and the company being valued and make adjustments to the financial statements as needed 1. Accounting choices, event issues (transitory shocks), entity issues v. Assess the comparability of the potential comps based on the characteristics that drive variation in the chosen MM and choose the comps 1. vi. Based on the comparability reviews, select the appropriate MM to use for the company being valued. 1. E.g. cant use FCF multiple if cash flows are negative (or any comps have negative FCF). Also, try not to mix claimholders in numerator and denominator. vii. Measure the market value of the equity and firm, as well as the company characteristics for the denominators of the MM selected. 1. Most recent value, not averages. viii. Measure the relevant range and measure of central tendency of the multiples to be used ix. Value the company using the MM and assess the reasonable range and consistency of valuations across the different multiples LBOs a. A group of private investors uses debt financing to purchase a corporation or a corporate division. Equity securities of the company are no longer publicly traded, though the debt and preferred stock may be publicly traded. b. Often invoves an LBO sponsor who contributes expertise and a mgmt. team. c. Large increase in D/TIC from 24% to 70% d. Management ownership increases. e. Good potential LBO candidates: low risk, so can layer on risky financing i. History of profitability ii. Predictable CFs to service financing charges iii. Low current debt and high excess cash iv. Readily separable assets or businesses v. Strong mgmt. team risk tolerant vi. Known products, strong market position vii. Little danger of technological change (high tech?) viii. Low-cost producers with modern capital f. Exit strategies i. IPO or RLBO ii. Buyout by strategic or financial buyer iii. Leveraged recapitalization after the debt is paid down, the entity issues a new round of debt and pays a dividend to equity holders. g. Reasons for LBO i. Increase in debt and concentrated ownership increases mgmt. incnentives to max value

XVII.

Non-mgmt with significant stake increases board effectiveness Advantages to being private no filings! Tax benefits from higher debt Transfer wealth from other stakeholders in the firm such as employees and bondholders 1. Not good evidence for wealth transfer from employees 2. Bondholders lose some wealth ~2% Valuing Financial Institutions a. Similar to non-finacial firms, but a few key differneces b. Categories of financial services i. Banks ii. Insurance companies iii. Investment banks iv. Investment firms c. Difference due to: i. Regulatory constraints 1. Capital ratio requirements 2. Constrained as to where they can invest their funds. 3. Need to be approved by State banking and insurance commissions before a new firm can enter the market. ii. Accounting rules 1. Mark-to-market accounting applies (accountants record and update assets and liabilities at their fair market value. 2. Loan loss provisions smooth out earnings iii. Use of debt 1. Debt of a financial firm cannot be separated from its operatings DCF and WACC are difficult because they use unlevered FCF! 2. Leverage is high (before crisis, Vf/Ve = 30, so a 1% error in firm value leads to a 30% error in equity value. So estimating equity value by first valuing the firm is dangerous. iv. Reinvestment that affects free cash flows 1. To forecast FCF, we need to forecast reinvestments in regulatory capital (requirement depends on type of institution). 2. Some analysts just forecast and value the dividend stream instead of FCF stream because dividends tend to be stable for financial firms. a. Only need to know i. Cost of equity capital 1. Skip unlevering and levering bc capital structures among financial firms in the same sector are often homogenous due to regulations and a financial firms debt and capital structure are difficult to measure. Hence, even if we wanted to unlever and lever the cost of capital, it would be a shitty estimate. ii. Expected growth rate in dividends 1. Need to check how retained earnings are reinvested. For a stable firm a. E[Gdiv]=(1-Payout)*ROE iii. Payout policy. 1. Similarly Payout = 1-{E[Gdiv]/ROE}

ii. iii. iv. v.

XVIII.

Insider Trading a. Def: information about the value of a security that is not publicaly available and that would causes prices to change if publicly known.

Questions: High ROA can be good or bad. Why? Is high Advertising/Revenue bad, or a source of competitive advantage? In model, what should you do with excess cash? Trade cash-cycle? Provision for bad-debts ratio increases, FCF increases. Why? How do you go from year-end to mid-year valuation? Specifically for debt? What do you do with excess cash in your financial model?? Equity-based compensation causes dilution. Why??? Are options dilutive? How does Rwacc account for how we value tax shields?