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FINC206 > Forgets > Flashcards

Forgets Flashcards

1
Q

IRR rule if - CFS front/back loaded

A

front
IRR> r
back
IRR< r

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2
Q

IRR assumes

A

all FCFs reinvested at IRR

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3
Q

MIRR 3 different approaches

A

Discounting
- disc all -CFS back to 0
Reinvestment
- put all CFS but CF0 forward to end
Combination
- both disc - CFS to 0 and put all other Cfs forwards to end

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4
Q

NPV and IRR give same decision BUT

A

mutually exclusive (CFo and timing very different)
non-conventional CFs

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5
Q

Payback Period problem

A

NPV could be -

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6
Q

PI helpful when

A

funds are limited

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7
Q

Dep Tax Shield

A

Tc x Dep

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8
Q

3 techniques for comparing mutually exclusive projects with different lives and which method to use

A

LCLife
NPV Perpetuity
Equivalent Annul Cost

  • identical r give all same
  • diff r use NPV perp first, LCF and NPV give different and then never use EAC
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9
Q

scenario vs sensitivity analysis

A

sensitivity is effect of change of one avr and scenario is whole bunch of assumptions

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10
Q

What about NPV at accounting BE?

A

-

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11
Q

Acct vs Finc BE

A

when net profit=0
sales when NPV=0 or IRR=r

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12
Q

real and financial options represent ____ to __( end part diff for each)

A

the right but not obligation to
real: take some action in future
finc: purchase something in future for price set today

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13
Q

3 real options

A

expand, delay, abandon

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14
Q

what 4 things need to be true for options analysis to exist in real investment analysis

A

flexbility
uncertainty
learning
irreversibility

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15
Q

2 limitations to real options

A

increase capital investment values which increase agency risk
assumes perfect foresight

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16
Q

goal for capital structure

A

minimize WACC, maximise firm value

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17
Q

business risk

A

equity risk arising from nature of firms operating activities and is directly related to systematic risk of firms assets

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18
Q

financial risk

A

equity risk arising from capital structure of firm

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19
Q

when earnings perform good and and with debt and what is BE

A

good: EBIT> BE pt
bad: EBIT< BE pt

BE pt: EPSu=EPSl

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20
Q

why lev increases ROE if ROA>Rb

A

as ROA measures how efficiently a company’s assets can generate profits.
if RA>Rb it means the company is earning more from its investments than it is paying in interest

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21
Q

Homemade leverage

A

Unlev + Lev
Not paying int but want to, Shint gonna be -
Borrow D/E of shares owned money from bank at same rate as firm and use to buy shares
CF going to be EPSU x new number shares (more than before) - SH int

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22
Q

De-lever

A

Lev + de-lever
Paying int but don’t want to so going to receive int
Sell D/V shares and put those into bank at same rate as firm
CF going to be EPSL x new shares owned(less) + SHint

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23
Q

MM1,2,3

A

value, Rs, WACC

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24
Q

MM1,2,3 with and without taxes

A

without
1
Vu=Vl, cap structure/debt is irrelevant
2
Rs is increased with D as shareholders need compensating
3
WACC u=WACC l=Ro
with taxes
1
Vl= Vu+ TcB (dtax shield), debt increases value of firm
2
cost of eq to lev firm is cost of unless firm plus risk premium
3
lev firm WACC is lower as increased value

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25
Q

Int tax shield

A

Rb x D x Tc

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26
Q

D/E to D/V

A

D/E/ 1+ D/E

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27
Q

D/V to D/E

A

D/V/ 1-D/V

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28
Q

2 critiques of MM props

A

personal tax disadvantage of debt makes corp tax advantage ineffective

borrowers incur side costs of debt (bankruptcy costs and agency costs of debt) which can offset value of int tax shield

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29
Q

who bares future costs of bankruptcy?

A

shareholders

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30
Q

3 selfish strategies shareholders take and why?

A

underinvestment
- shareholders would be wanted to put more money in so that increased debt holder value
take large risk
higher risk
- -NPV projects destroy value to bondholders
milking it out
- pay out extra divs to decrease value to bondholders

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31
Q

2 ways to decrease agency costs of debt

A

repurchase debt prior to bankruptcy
increase return to bondholders

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32
Q

trade-off theory of debt

A

trade-off between PV debt tax shield and costs of financial distress

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33
Q

optimal cap structure is ___ but firms are

A

static
dynamic

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34
Q

debt 2 adv and disadvand their implications

A

adv
- tax benefit (lowers taxable income), higher Tc higher advantage
-reduced agency costs equity, increases cost of equity: FCF possible wasteful managers, makes them work harder , as sep between stock and managers increase, benefits ti using debt increase
disadvantage
- agency costs of debt(shareholders being sneaky), firms where lenders have control over how monry used should be able to borrow more
- bankruptcy costs, firms with more stable earnings and lower bankruptcy costs should borrow more

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35
Q

MM and personal taxes

A

with
Gain lev= TcB if TPs=TPb
without
Gain lev=0 if (1-Tc)(1-Tps)=(1-Tcb)

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36
Q

classical tax system

A

double taxation
favours corp debt
many outcomes depending on individuals tax rate and D/E ratio

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37
Q

imputation tax system

A

Tc=0
corporate profits are taxed at the corporate level, but the tax paid by the corporation is credited to shareholders when they receive dividends
no tax adv of debt
eq income oney taxed at personal tax rate
debt is not attractive

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38
Q

if management know Veq<Market value

A

they will issue shares and @announcement investors learn so SP decreases

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39
Q

pecking order theory

A

ret earnings (cheapest), debt, equity

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40
Q

according to pecking order theory what should happen on announcement of debt

A

negative impact on SP

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41
Q

according to pecking order theory if internal CF> cap investment

A

surplus used to pay debt

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42
Q

3 conflicts of pecking order theory with trade-off theory

A

no target D/E
profitable firms use less debt
firms like financial slack and like to have cash readily avaliable

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43
Q

factors in D/E ratio

A

taxes
type of assets
uncertainty of operating income

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44
Q

When to use APV, FTE, WACC

A

APV when level of debt is known
FTW when large levered firms
WACC most common

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45
Q

working out D+S=V in APV

A

APV becomes V and D is amount of loan

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46
Q

APV and floatation costs

A

minus from loan amount and then add PV of Fcost tax shield so each years amont x Tc present values

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47
Q

NPVF of loan

A

+ in year 0 of loan, - AT int payments each year - principal loan at t

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48
Q

NPV all eq if depreciation is risk less

A
  • price + EBTD x (1-Tc) x PVIFA + PV Deep tax shield(Dep x Tc x PVIFA), remember to disc dip tax shield at diskless rate
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49
Q

4 financing side effects

A

tax subsidy to debt
costs of issuing new securities
costs of financial distress
subsidies to debt financing

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50
Q

3 ways to value a firm with debt

A

APV, FTE, WACC

51
Q

NPVF for 3 diff financing side effects

A

tax subsidy to debt
= PV (int tax shield)
costs of issuing new securities
= NPV (floatation costs)
subsidies to debt financing
= NPV (loan)

52
Q

in a non-perpetual analysis FTE approach

A

LCF= UCF- AT financing expense
at t LCF will be UCF- AT financing expense -loan
discount LCF at levered Rs
calc Rs by V=APV
year0 - debt amount from initial
years 1-t normal CF- at int payment
year t -off whatever the loan amount

53
Q

equity value can __ but debt __

A

flucuate
can’t

54
Q

in a perpetual analysis FTE approach

A

net income/Rs (net income being Earning after interest after depreciation)

55
Q

WACC method

A

discount UCF at WACC

56
Q

scale enhancing project

A

similar to those of firms existing assets

57
Q

non-scale enhancing project

A

different area

58
Q

Asset B

A

B0=Ba=Bunlev

59
Q

Equity B (lev B)

A

Beq=Bs

60
Q

Beta infos with and without corp taxes

A

without
Bd=0
with
Bs>Bunlev

61
Q

Bs is __ related to lev of firm

A

+

62
Q

pure play

A

de-lever Bs to get Bo for PP using PP D/E
re-lever Bo using D/E of projects firm

63
Q

Opportunity cost

A

value of the best alternative forgone where, given limited resources, a choice needs to be made

64
Q

Nominal CFs

A

actual dollar amount received

65
Q

Real CFs

A

refers to CF purchasing power

66
Q

after 1st year abandon project if __ and sales Q of this

A

PV of FCFS< selling amount
equate PV FCFS to abandon value and solve for q

67
Q

Net income for a firm with debt

A

EBIT- Int (Rb x D)

68
Q

what happens to S.O in a share repurchase

A

decreases

69
Q

return of divs

A

divs/owns stocks

70
Q

increase in value of a firm with int

A

PV int tax shield (B x Rb) x Tc

71
Q

value to shareholders/ of equity after payments to debt holders

A

is residual value after paid debt holders

72
Q

make stockholders indifferent to debt holders increasing payment make

A

E(Ve) low vloatility= E(Ve) high volatility and make high vol one have x in it

73
Q

promised vs expected return to debt holders

A

face value/MV debt - 1
expected value debt/MV debt -1

74
Q

How to work out how many shares currently held will need to purchase a new share?

A

RI terms: shares on issue/number new shares

75
Q

RI terms

A

1:16 or 16 means can buy one extra for every 16 held
Shares on offer/ number rights given out
(number of shares held to be entitled for a right)

76
Q

n and r in theoretical value of a right formula

A

n is RI terms (number of shares held to obtain a right)
r additional shares offered for each right (2:1 offering 2 for every 1 so additional is 2)

77
Q

RI shareholder wealth after

A

bought RI x shares owned number of shares
(new number shares owned x Pex) - (number shares bought x sub price)

78
Q

RI options if or if not rennouncable

A

if :
can sell their rights to maintain wealth level
if not:
prefer whichever plan decreases SP by littlest as RI can dilute shareholder wealth

79
Q

Winner’s curse

A

Profit if UV and OV
= no shares(UV amount)-no shares(OV amount)
but then UV only recieve half

80
Q

Cash offer with x required sale proceeds

A

X*(1-UW %)=Raise

81
Q

main reason to lease

A

tax deductibility of lease payments

82
Q

operating vs financial lease

A

operating like a rental agreement, lessor still own and maintain lessee pay payments, can cancel, not fully amortised
financial, lessor doesn’t maintain more flexibility for them, fully amortized, lessee becomes owner at end

83
Q

2 types of financial lease

A

sale and lease back
leveraged lease

84
Q

4 conditions for a financial(capital lease)

A

PV lease payments > 90% of Mv of asset
Bought by lessee at end
lease life>75% of assets life
lessee has a bargain purchase option at expiry

85
Q

2 things i forget for NAL

A

discount at after tax cost of debt
if paid at start of year lay out which years are what for accurate PVIFA/discounting

86
Q

lessor req payments

A

amount to be amortized= initial outlay- PV AT salvage- PV deep tax shield and amount amortized= PV AT lease income which = PVIFA x AT annual lease payment so lease payment =AT lease /(1-tc)

87
Q

debt displacement and lease

A

The reduction in a company’s ability to borrow because it leases its assets. debt displacement occurs when a company receives income from its leases, it prevents the company from using those assets as collateral for a loan.
if lease not use as much debt as if borrowed to buy
lend more to purchasing firms as they are using more debt capacity s can cover from int side of things

88
Q

when to carry more debt under purchase option

A

AT CFs buy> AT lease payments

89
Q

the NAL= ? when firms indifferent to buy or lease

A

NAL=0

90
Q

recognise residual dividend policy

A

it is if CAPEX< EPS and any div, not if other ways round and paying div as investment funding would require more than earning so should not be any divs paid should all go to capex

91
Q

recognise smoothed dividend policy

A

div payout ratio equal ish
Payout: Div per share/EPS

92
Q

recognise stable dividend policy

A

stable stream of dollar dividend payments, which are expected to increase over time in line with permanent increases in firm earnings.
if EPS increasing and Div per share makes sense

93
Q

low regular plus extra policy

A

pay low stable amount to give shareholders consistent income then extra if doing well

94
Q

in finc206 does share repurchase change shareholder wealth

A

no as can sell shares for 46 or keep shares worth 46 as SP doesn’t change

95
Q

prefer extra div or shares repurchase

A

shares repurchase keeps SP high and gives options to sell or keep

96
Q

MM irrelevance theory

A

dividend policy is irrelevant , payin div or issuing new shares DOESN”T change shareholder wealth or firm value

97
Q

ex div day

A

owners on or after won’t receive div

98
Q

typically share price falls by

A

less than div amount due to taxation

99
Q

div policy is trade-off

A

between retaining earnings for investment or paying out divs and issuing new shares to replace cash paid out

100
Q

gain in div income for shareholders is

A

offset by loss of capital gains

101
Q

in div imputation system how much does SP fall by?

A

> tan div due to value of franking credit

102
Q

in div imputation system firm essentially

A

pays tax on div income on behalf of shareholder

103
Q

non-tax relevance of div policy (

A

info signalling
current income prefs
div stability
decrease in agency costs
share issue cost for firm
transaction costs for investors
clientele effect ( firms adopt div payout policy for which there is excess demand)

104
Q

Pcum

A

share price just before stock pays div

105
Q

Current return for shareholders

A

(Divs(x growth rate maybe)/Shares) + growth rate

106
Q

value of target firm to acquiring firm

A

number of shares outstanding times the price per share under the new growth rate assumptions

107
Q

gain from acquisition

A

value of the target firm to the acquiring firm minus the market value of the target

108
Q

NPV acquisiton

A

value of the target firm to the acquiring firm minus the cost of the acquisition

109
Q

Max acquiring firm pay per share

A

value of the target to the acquirer divided by the number of target’s shares

110
Q

share price in merged firm

A

MVA + value of B to A / Shares A+Shares B

111
Q

for a stock offer to be equivalent to cash offer

A

set the value of the share exchange offer equal to the value of the cash offer: Vab*h= cash offer
shareholders of target would be equally well off if they received this % of stock in new company

112
Q

Ownership % of target shareholders in new firm

A

Ownership %= new shares issues/ (new shares issues+ current shares of acq firm)

113
Q

exchange ratio

A

The exchange ratio is the number of shares of acquiring firm offered for each share of target firm
Exchange ratio = New shares issued/ Existing shares in target firm

114
Q

increase eco of scale

A

spread FC over more units

115
Q

increase eco of scope

A

benefits from enhancing breadth of g/s

116
Q

7 motives for acquisition

A

synergy creation, economic gain
operating synergies
financial synergies
revenue enhancement
cost reduction
tax gains
reduced capital requirement (disposal of duplicated fixed cap/WC)

117
Q

CCC formula and each formula

A

Inv day+ A/R days- A/P days

Inv days:
Inv/ave daily COGS

A/R
A/R/ ave daily sales

A/P
A/P/ave daily COGS

118
Q

commitment fee you pay on

A

unused portion
pay int on total not fee
then pay fee on unused

119
Q

compensating balance

A

hold % in acct so only receive amount-holding
pay int on full and maybe on balance too
payback= (borrowed total+int)- (holding+holding int)

120
Q

loan % IR 2 things

A

pay/recieved-1 and EAR it

121
Q

if it says compensating balance on face value

A

amount + fees / (1-%)

122
Q
A
123
Q

Cfs for NPVF
floatation cost
loan/tax subs

A

if not loan just PV after-tax int payments
floatation cost
year 0 - float cost
other years inc at end + float cost tax shield
loan
year 0 + loan given
years 1-t -after tax int payments
t inc after tax int payments, - principal pay back of loan

FINC206 (4 decks)

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