Emerging Markets
Emerging Markets
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Summaries
Valuation
Approach
1) Real valuation: By real cash flow
and real cost of capital
2) Nominal valuation: By nominal cash
flow and nominal cost of capital
*** 1 + Real growth rate = (1+
nominal growth rate) / (1+inflation rate)
Cash flow
of nominal NWC is associated with change of NWC. But NOT the case for real NWC.
Net income
+ interest (1-t) + D + A
= EBITDA
– adjusted tax (where adjusted tax = tax – interest*t))
= NOPLAT
(which is EBITA – adjusted tax) + D = Net Operating Profit Less Adjusted
Tax + D
Invested
capital = NWC + net PPE
Country
risk should be taken care by adjusting the cash flow instead of the discount
rate:
1) the risk is diversifiable
2) different companies handle and are
affected differently
3) country risk is one-sided risk
4) management forecasts risk by
adjusting cash flow instead of discount rate
To estimate WACC:
Risk free
rate = US 10 year bond yield + (local inflation –
Beta:
regress industry (not stock) against global market (not local market)
Premium:
over global diversified portfolio (~4.5 to 5.5%)
Pretax-rate:
1) as usual, firms’ outstanding debt YTM matters. 2) calculate local risk
free rate + US spread of similar firm over treasury notes
Weights:
Use global industry average of equity to asset and debt to asset ratios
Sovereign
risk = difference between dollar-dominated local government bonds and similar
In an
inflationary environment:
ROIC
overstated at nominal terms
Net
PPE/revenue is understated
NWC/revenue
is the same as real terms