Podcast
Questions and Answers
What is the primary limitation of using historical market premiums?
What is the primary limitation of using historical market premiums?
Regression analysis on dividend yields can always predict positive future market premiums.
Regression analysis on dividend yields can always predict positive future market premiums.
False
What is the suggested market premium range provided by Koller?
What is the suggested market premium range provided by Koller?
4.5% to 5.5%
During financial crises, a risk premium of _____% is considered reasonable.
During financial crises, a risk premium of _____% is considered reasonable.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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What primary factor does the CAPM model add to the risk-free rate?
What primary factor does the CAPM model add to the risk-free rate?
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Scholars predominantly use treasury bills as an approximation for the risk-free rate.
Scholars predominantly use treasury bills as an approximation for the risk-free rate.
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What does the symbol $eta_i$ represent in the CAPM equation?
What does the symbol $eta_i$ represent in the CAPM equation?
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The current yield on the 90-day German treasury bill is _____%.
The current yield on the 90-day German treasury bill is _____%.
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Match the components of the CAPM equation with their meanings:
Match the components of the CAPM equation with their meanings:
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Which of the following statements about CAPM is correct?
Which of the following statements about CAPM is correct?
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The estimation of the risk-free rate is uniform among all practitioners.
The estimation of the risk-free rate is uniform among all practitioners.
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What type of government bond is preferred for estimating the risk-free rate due to better alignment with the period of analysis?
What type of government bond is preferred for estimating the risk-free rate due to better alignment with the period of analysis?
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What is the market value weight assigned to common equity?
What is the market value weight assigned to common equity?
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The Fama-French three-factor model has been fully accepted without any ongoing research needed.
The Fama-French three-factor model has been fully accepted without any ongoing research needed.
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What is the chosen tax rate for the calculations?
What is the chosen tax rate for the calculations?
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The model favored by practitioners for estimating cost of equity is the ______.
The model favored by practitioners for estimating cost of equity is the ______.
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Which of the following is a limitation of the CAPM identified by Fama and French?
Which of the following is a limitation of the CAPM identified by Fama and French?
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The average effective tax rate for the company is _____ according to historical data.
The average effective tax rate for the company is _____ according to historical data.
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Match the following models with their key features:
Match the following models with their key features:
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What are the two additional factors introduced by the Fama-French three-factor model?
What are the two additional factors introduced by the Fama-French three-factor model?
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Study Notes
Bachelor Thesis: Valuation of BMW
- Authors: Rasmus Ramshøj Pløen (Exam no. 282821, BSc (B/IM)) and Mikkel Kronborg Olesen (Exam no. 283755, BSc (B))
- Academic Advisor: Nicolai Borcher Hansen (ASB, Aarhus School of Business)
- Date: May 3rd, 2010
Table of Contents
- The thesis is structured with multiple sections, outlining the analysis and valuation techniques
- Historical financial analysis is performed to assess the company's past performance, including a reorganization of financial statements for accurate economic profit analysis
- Estimating market value weights and tax and the cost of equity and debt are core aspects of the cost of capital calculation
- External analysis considers the general environment using PEST analysis, and competitor analysis using Porter’s Five Forces
- Internal analysis employs McKinsey’s 7S model and VRIO framework to determine internal capabilities
- Forecasting and valuation involves both discounted cash flow (DCF) and economic value added (EVA) models to yield a market value for BMW's equity and different stock classes
- Appendices provide detailed analyses for certain factors (financial statements in appendix 2, beta calculation in appendix 3, PEST analysis in appendix 5, etc.)
Preface
- The report is intended for an academic audience with assumed basic economic knowledge
- A CD containing the report and spreadsheets is included for easier access
- Spreadsheets were created from scratch, allowing for a deeper understanding of the company's accounts and financial statements
- A PowerPoint slide show containing appendices is included for easier navigation during reading
- The report follows the guidelines set by Aarhus School of Business for bachelor theses
Problem Statement
- Maintaining operations is a major concern for the company
- The volatility of BMW’s stock prices (during the 2005-2009 period), needs a market value assessment considering strategic and financial factors and a comparison between preferred and common stocks
- Research question: What is the market value of BMW's equity and its stock types?
Historical Financial Analysis
- Focus is on economic profit rather than accounting profit
- Key measures:
- NOPLAT (Net Operating Profit After Taxes)
- ROIC (Return on Invested Capital)
- FCF (Free Cash Flow)
- Consistent accounting standards (IFRS) for easier interpretation during analyses
Cost of Capital
- Valuation methodology is based on discounting future cash flows with the weighted average cost of capital (WACC)
External Strategic Analysis
- Industry analysis using the Degree of Turbulence (DOT) model and Porter’s Five Forces model.
- The analysis highlights changes in the environment, emphasizing the importance of social factors, economic factors, technological aspects and political factors.
- Socio-cultural trends (growing middle class, demand for green products);
- Economic factors (GDP growth, interest rate risk, raw material costs, currency fluctuations),
- Political factors (new laws, political instability in emerging markets)
- Technological factors (environmental friendly solutions)
Internal Strategic Analysis
- Evaluation of internal resources using the VRIO Framework and McKinsey's 7S model
- Tangible assets: facilities in multiple countries, financial management to support operations
- Intangible assets (brands, R&D, employee skills), and organizational capabilities (strategic alliances)
Forecasting and Valuation
- Valuation method (DCF and EVA) and sensitivity analysis
- Forecast drivers, focusing on short-term, mid-term, and long-term forecasts to estimate value drivers
- Variables and metrics used in the analysis (revenue, cost of goods sold, sales and administrative costs, R&D, operational income and expenses, equity investments, interest expenses, and tax)
Key Factors of Success
- Identifies key factors affecting success in the automotive industry (customer base, corporate strategy, competitors, relevant business areas)
SWOT Analysis
- Summarizes external and internal analysis to determine opportunities and threats for BMW
- Prioritizes strategic challenges and areas for long-term improvement
Conclusion
- Provides a summary of the findings, confirming the undervalued stock classes based on a multi-faceted analysis.
- Discusses the key factors that could drive valuation in a positive direction (brand, innovation, operational efficiency)
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Description
Test your knowledge on the Capital Asset Pricing Model (CAPM) and market premiums. This quiz covers key concepts such as historical market premiums, risk-free rates, and the estimation methods used by scholars. Challenge yourself with questions that delve into the nuances of financial theories.
