Corp Fi

Front 1

Initial investment outlay..expansion

Back 1

FCInv(up front price including ship and instal) + NCWInv (invest in net working capital)

Front 2

NWCinv ..expansion

Back 2

NWCInv = Δnon-cash current assets − Δnon-debt current liabilities

Front 3

After tax operating cf for a project..expansion

Back 3

CF = (S − C − D)(1 − T) + D

= (S − C)(1 − T) + (TD)

where:S = salesC = cash operating costsD = depreciation expenseT = marginal tax rate

Front 4

Terminal year after-tax non-operating cash flows (TNOCF)..expansion

Back 4

Terminal year after-tax non-operating cash flows (TNOCF). At the end of the asset’s life, there are certain cash inflows that occur. These are the after-tax salvage value and the return of the net working capital.TNOCF = SalT + NWCInv − T (SalT − BT)where:SalT = pre-tax cash proceeds from sale of fixed capitalBT = book value of the fixed capital sold

Front 5

Replacement initial outlay

Back 5

FCInv + NWCInv - Sale old + T(sale old -Book0ld)

Front 6

Replacement ocf

Back 6

(Change sales - change op costs) *(1-T) + (change in depreciation*T)

Front 7

Replacement terminal

Back 7

(Sale new - sale old) + NWCInv - T (sale new - book new) - (sale old - book old)

Front 8

Npv

Back 8

Find npv of initial outlay cf of each year + terminal

Front 9

Mutually exclusive projects use for evaluation

Back 9

1 least common multiple of lives

2 EEA equiv annual annuity(find npv...if given rr, npv, years solve for payment on calculator)

Front 10

Capital rationing

Back 10

Choose all projects company can afford with highest total NPV

Front 11

Sensitivity and scenerio

Back 11

Sens changes 1 variable. Scenerio allows for changes in multiple inputs

Front 12

Simulation analysis

Back 12

Probablility distribution of NPV project outcomes

Front 13

Simultaion steps

Back 13

1 Assume probabiltiy distribution of each input variable

2 simulate random draw from distrubtion for each variable

3 calculate npv off inouts from step 2

4 repeat 2 and 3 10,000.times

5 calc mean, sd, correlation of NPV woth each inout variable

6 graph the 10k distributions

Front 14

Beta is a systematic risk measure in capital budgeting

..in combo with CAPM is used to find discount rate

Back 14

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Front 15

CAPM(SML)

Back 15

Rf + beta ( e(rMkt)-Rf)

Front 16

Beta of a project is hurdle rate and should be used instead of company WACC

Back 16

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Front 17

Abandonment options

Back 17

Allow mgmt to stop a project

Front 18

Accounting and economic income alternatives to discounted cashflows

Back 18

.

Front 19

Economic income

Back 19

After tax cf plus change in investment market value

Front 20

Accounting income

Back 20

Reported NI ..differs cause depreciation based on cost not market value..and finance charges are a sep line item and subtracted out not subtracted in wacc

Front 21

Economic profit

Back 21

NOPAT-$WACC....NOPAT=EBIT*(1-T)...$WACC=WACC*CAPITAL=dollar cost of capital

Front 22

MVA

Back 22

Econ profit/ 1+wacc^year

Front 23

Residual income

Back 23

NI - equity charge. Which is(rr * beg BV)

Front 24

Claims valuation approach

Back 24

Takes pv of princ and int payments for bondholders and pv of divs share repurchase for equity holders

Front 25

Costs of Asymmetric info

Back 25

Mgrs have more info than investors...increases w use of more equity

Front 26

Static trade off theory

Back 26

Balance costs of financial distress with tax shield benefits by using debt and states there is optimal proportion of debt

Front 27

Theories of dividend policy

Back 27

1 div irrelevance-div have no affect on price of stock.

2 bird in hand- higher value on divs now then expected returns

3 tax aversion- if div taxed higher than cap gains theyd rather not have divs

Front 28

Pecking order (asymetric )

Back 28

Mgrs prefer financing that send least amt of signal...internal cap, debt, equity

Front 29

Net agency costs..associated w conflict of interest of mgrs and owners =

Back 29

1 monitoring costs

2 bonding costs

3 residual losses

Front 30

Eff tax rate on divs

Back 30

Corp tax rate +((1-corp tax rate)*ind tax rate))...same for split rate but use div tax rate instead of corp rate

Front 31

Imputation tax on div

Back 31

If 30% corp tax and ind is in 20% bracket they would get a credit for the 10%

Front 32

Expected increaae in divs

Back 32

(Expected earnings*target payout ratio) -prev divy) * adj factor...where adj factor is 1/#year adjustment will take place

Front 33

Costant div payout policy

Back 33

Always pays out same % of earnings

Front 34

Residual div model

Back 34

1 find optimal capital budget

2 find amt of equity needed to finance that budget

3 meet equoty requirements w retained earnings

4 pay divs with the residualbearnings that are left over

Front 35

4 common methods to buy backbstock

Back 35

1 open market

2 fixed price tendor-pre determined amt ofnshares and price(shows more confidence than dutch)

3 dutch auction- companybsets price range (quicker than fixed)

4 repurchase by direct negotiation- from a major shareholder at a premium

Front 36

If earnings yield is higher than cost of debt than a share repurchase with debt will increase eps

Back 36

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Front 37

The following generalizations can be made with respect to global trends in corporate payout policies:A lower proportion of U.S. companies pay dividends compared to their European counterparts.Globally, in developed markets, the proportion of companies paying cash dividends has trended downwards over the long term.The percentage of companies making stock repurchases has been trending upwards in the United States since the 1980s and in the United Kingdom and continental Europe since the 1990s

Back 37

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Front 38

FCFE cov ratio

Back 38

FCFE (includong net borrowing)/ div + share repurchases...shouldnt consistently be under 1

Front 39

Div coverage ratio

Back 39

Inverse of payout ratio

Front 40

Stock div leave ratios unchanged. Retained earnings goes down and contributed cap goes up

Back 40

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Front 41

Stakeholder impact analysis

Back 41

1. Ident relevant stakeholders

2 ident interest of each group

3 indet demands of each group

4 prioritize importance of stakeholders

5. Indetify the challenges these coflicts ofndemands pose

Front 42

2 major objective corp gov

Back 42

1 reduce or eliminate conflict of interests

2 use assets in best interests ofbshareholders andnother stakeholders

Front 43

Having separate ceo and board chairman is strong corp gov

Back 43

.

Front 44

Merger integration types.

Statutory

Subsidiary

Consolidation

Back 44

1. Target no longer exists

2. Target becomes subsidiary

3. Neither continues to exist and new entity formed

Front 45

Meger types

Horizontal

Vertical

Conglomerate

Back 45

1. 2 busineeses in same industry

2. To move up or down supply chain in its current industry(fwd ice cream trying to buy restaraunt chain or bkwd ice cream trying to biy milknproducers)

3. Two companies with 2 separate industries

Front 46

Bootsrapping eps

Back 46

A high eps buying a low p/eps and its p/e lowers but no economic value created

Front 47

Hostile merger

Bear hug

Tender offer

Proxy battle

Back 47

1 Acquirer goes to board

2 offer to buy directly from shareholders

3 acquirer seeks to gain control from shareholder approval

Front 48

HHI

Back 48

<1k not conecnetrated...anti trust unlikely

1k to 1.8k moderately concentrated..merger may be challenged on anti trust if moves hhi over 100

>1.8k highly concentrated... merger may be challenged on anti trust if moves hhi over 50

Front 49

Pre merger HHI ...20 firms in industry, 5% market share

Back 49

HHI = 20 * (.05*100)^2...after meger for 19 and 20...18*(.05*100)^2 + (.1*100)^2

Front 50

Unlevered NI

Back 50

Ebit *(1-t)....can back into tax rate by dividing taxes by NI brefore tax

Front 51

FCFF for corp fi

Back 51

NI + net interest after tax +- change in def tax (NOPLAT) +non cash charches - change in WC - CAPEX

Front 52

Net interest after tax

Back 52

(Int expense -int income) *( 1-tax rate)

Front 53

Terminal value constant growth

Back 53

Fcf *(1+g?) / (wacc adj - g)

Front 54

Terminal 2nd method applies where analyst thinks stock will trade at at end of 1st stage

Back 54

FCFt * (p/fcf)

Front 55

Steps to estimate value using DCF

Back 55

1. Determinenwhich fcf model...basic ones are 2 or 3 stage.

2 develop pro forma estimates

3. Find FCFF

4 discount FC using adjusted WACC

5 find terminal value and discount

6 add discounted FC and terminal

Front 56

Takeover premium

Back 56

DP - SP / SP ..dp is deal price per share...sp is targets stock price

Front 57

Valuing a merger target using company anlysis

Back 57

1 comps

2 calculate realtives (pe pb etc) of comparablea

3 find the avgerges of pe pb etc for the comparables

4 times comoanys eps by avg p/e of comparables and its bv by bv/s etc and take those avgs forr mean stock value

5 find the target price of the comps(dp-sp / sp) and take those avg to find the % premium to be paid on top of mean stock value from step 4

Front 58

Valuing a merger targtet using transaction anlysis

Back 58

1 find comps transactions

2 find pe pb etc of comp(ie eps / deal price per share)

3. Find avgs of pe pb etc

4 times targets eps by avg com pe pb etc and then take the Avg of these

Front 59

All mergers the new company should be worth mire than the separate companies combined

Vat=

Back 59

Va +Vt - s -c

Va=val of acquirer

Vt=target

S=synergies created

C=cash paid to target sholders

Front 60

Cash offer target has less risk and reward

Stock offer target has more risk more reward

Back 60

.

Front 61

Types of divestitures

1.equoty carve out

2 spin off

3 split off

4 Liquidation

Back 61

1. New company thatbhas an ipo

2 new company where current shareholders are distributed shares

3 shareholders get new shares in EXchange for shares in parent

4 break up company and sell off piece by piece

Front 62

Monte carlo system/simulation analysis

Back 62

Results in a probabilty distribution of npv. Not just limited outcomes.

Front 63

3 main factors when evaluating how cap structure affects value

Back 63

1 changes in cap structure over time

2 differences in cap structure to comp firms

3 company specific factors like corp gov that may impact agency costs

Front 64

Ggm equity risk premium

Back 64

Div yield + LT earnings growth - LT gov bond yield

Front 65

Division no longer fits

Lack if prof

Back 65

1 parent unable to make profit or notbstrategic fit to long term. To focus on core. Sells tto firm who can utilize more effectively

2 return is less than cost of capital could be due to bad choice in 1st place ornrising costs

Front 66

Audit committe should contain only independent board members

Back 66

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Front 67

Board should asses self not by mgmt

Back 67

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Front 68

Shares bought back*cost of shares * after tax cost of funds...subtract this from earningnin denominator when finding eps after a buyback

Back 68

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