CorpFin bb

Question 1

Does an expansion project effect current cashflows?

Answer 1

No

Question 2

What is the formula for an intial outlay into a new project?

Answer 2

Fixed investment + Working Capital - Tax (Salvage - BV)

Question 3

What is the formula for operating cashflows for a new project

Answer 3

(Sales - Depreciation - Expenses)(1-t) + Depreciation

Question 4

What is the formula for terminal value of a project

Answer 4

Salvage value+ Working capital - (Tax(Salvage-BV)

Question 5

Which two formulas in the new project cashflow analysis are pretty much the same

Answer 5

Outlay and terminal value. Just substitute fixed investment for salvage value

Question 6

Miller Malinga propositions . 2 versions

Answer 6

Without tax, corporate structure didn’t matter and wacc is constant.

With tax, you want to be as levered as possible cos debt is tax deductible. Higher debt is lower wacc

Question 7

Name and describe 4 share repurcahse mediums

Answer 7

Tender (will buy @ x price)
Direct negotitation
Open market
Dutch auction (we wannt buy x shares, everyone offers x shares at a low price, the highest price when the quota for the amount of shares they want repurchased is filled for all shares)

Question 8

Explain peking order theory

Answer 8

You want to fund projects from internal cash first, t hen debt then equity

Question 9

What is the static trade of theory?

Answer 9

You want to fund with debt UP UNTIL a point where the optimal capital structure is reached, therefore increasing the firm’s value

Question 10

Is a high or low WACC better

Answer 10

LOW bb

Question 11

Why would a firm have different optimal and target capital structures?

Answer 11

A firm may not want beyond a certain level of debt, even if it is to reduce the WACC, and therefore increase the firms’ value

Question 12

Why does actual capital structure deviate from target or optimal capital structure

Answer 12

Martket movements and the firm exploiting certain opportunities int eh market

Question 13

Which firms are generally more levered, US or Japan

Answer 13

Japan

Question 14

Do Japense prefer long or short term debt

Answer 14

Short

Question 15

Explain types of shares

Answer 15

Normal Div
Special div (given one off)
Stock div - gives stock instead of cash
Liquidating Div - when a firm dies, special div
Stock split - turns your one stock into 2 or 3

Question 16

What is, and adv and dis or Stock reinvestment plans

Answer 16

Reinvesting dividends to get more stocks

Good because allows to purchase more stock with no transaction costs
but bad because of tax and bookeeping

Question 17

WHy would a firm do a stock dividend

Answer 17

To reduce the stock price if overvalued, increase liquidity in the market by having more stocks so more accesible to the market

Question 18

Do stock splits effect any ratios

Answer 18

NO

Question 19

How do dividend payments effect Liquidity ratios and leverage

Answer 19

Leverage increases because equity goes down, liquidity decreases cos less cash

Question 20

Explain the 3 dividend policy theories

Answer 20

Miller Modagliani - it does not matter if a firm pays a stock because investors can create synthetic stocks by selling down capital

Tax aversion - People avoid dividends because of tax reasons

Bird in the hand - it is better to have dividends and no capital appreciation than no div AND no capital appreciation

Question 21

What is the clientele effect

Answer 21

It does not matter if a firm pays or does not pay a stock as investors are attractted to firms that suit their desires

Question 22

Does starting to pay a div mean the company has good prospects

Answer 22

Yes and no. It could mean that growth has stagnated, or that they have extra cash to burn.

Question 23

What are the effects of the dividend policy on the firm

Answer 23

Can effect the investments of the firm (which projects they invest in)
Financial flexibility - more cash = more opportunities
Volatility in the market means lower probability of divs
Tax can effect a firm’s decisions
Contractual obligations, covenants needing to be met

Question 24

What is dividend imputation

Answer 24

Divs are taxed at the higher of the corp or investor level. If the firm pays higher tax, the investor still needs to pay tax, but get a tax refund later

Question 25

What is the residual dividend model

Answer 25

Dividends = Net Income – (Target Equity Ratio x Total Capital Budget) So take your net income, work out how much should be equity, and subtract that from the net income

Question 26

What is a massive disadvantage of the residual div model

Answer 26

Divs can be volatile

Question 27

what happens at the ex div date?

Answer 27

The share price should drop by the amount of the dividend

Question 28

What does a share repurchase effect on the financial statements, and how does it effect leverage and EPS?

Answer 28

Asset decrease, Equity Decrease, Increased leverage (because debt is increased relative to equity) and EPS increases because there are less shares

Question 29

If you use debt to buy shares, which ratio do you need to compare to after tax cost of debt to increase EPS

Answer 29

Earnings yield. It must be higher than the after tax cost of debt to increase EPS

Question 30

If you buy your shares back, and the cost per share is more than the BVPS, what happens to BVPS after the transaction

Answer 30

Your BVPS will decrease bro

Question 31

What are 5 reasons for repurchasing shares instead of divs

Answer 31

Tax benefits of cap gains over income Send a positive message to the market Increased flexbility, you can buyback whenever you want To offset options of employees buying shares Increase leverage

Question 32

How does a share repurchase effect leverage

Answer 32

Increases it

Question 33

Name some motives for a merger

Answer 33

Synergy, access new markets, tax, management incentive

Question 34

What is bootstrap Earnings in Corporate finance?

Answer 34

It is when a firm with High PE aquired a low PE firm to boost its PE

Question 35

What are the 2 ways to finance an aquisition and why would you use either

Answer 35

Cash, shares. An aquirer wants to use cash always. A target may like shares instead if they beleive in combined entity will take off

Question 36

Give me some defense mechanisms PRE offer for a takeover

Answer 36

``` Poison pill (dilute own shares) Poison put (put all debt back on firm) Staggered board (delays takeover) Need for supermajority to accept takeover Golden parachute (huge payout needed for managemet) ```

Question 37

Post offer defense mechanisms

Answer 37

Lawyers Say no Greenmail - paying the acquirer to not own firm White knight - ask someone else to aquire you

Question 38

Explain the hershman heinman index and what the formula is?

Answer 38

It is the probability of the regulator stepping in the determine an antitrust law against a merger Formula is (Market share * 100)^2 -of each firm in the market Then compare that formula to what the result is after the merger, if the result changes by more than 50, there is a antitrust law inbound

Question 39

Is the sharpe ratio effected by cash

Answer 39

no

Question 40

What is the differene between the comparable company and comparable transaction approach?

Answer 40

The comparable transaction approach already includes the takeover premium

Question 41

Fomua for takeover premium

Answer 41

The Aquisition price - pre annnouncment share price / pre announcement share price

Question 42

How do you do the comparable company method (ratios etc.)

Answer 42

You take comparable comany's ratios, then compare that to your ratios to determine a price, BUT THEN ADD THE Takeover premium

Question 43

POst merger EPS, how to calc

Answer 43

So, earnings is just the combination of the 2 entities, the shares will INCREASE by the $ per acquirer divided by aquiree. Share price of acquiree divided by that number is the NEW SHARES CREAteD

Question 44

Explain the difference between an equity carve out, spin off and split out

Answer 44

Split out - new firm, we take your shares and give you new ones (only some shareholders) Spin off - just recieve new shares Equity carve out - Creation of a new entity that gives cash inflow to the parent.

Question 45

Increased inflation does what to profitability and why

Answer 45

Increased inflation reduces the value of the depreciation tax shelter

Question 46

What are the 4 reasons for a divesture

Answer 46

Bad fit, poor profitability, can sell for good profit, we need the cash

Question 47

What is the formula for the value of a firm post acquisition

Answer 47

Value of both firms + Synergy value - cash paid