Corporate Finance Flashcards
Annual After-Tax Operating Cash Flow:
Annual After-Tax Operating Cash Flow: CF = (S – C – D)(1 – T) + D ; S-sales, C-cash operating expense, D-depreciation charge,
Terminal Year After-Tax Non-Operating Cash Flow:
Terminal Year After-Tax Non-Operating Cash Flow: TNOCF = SalT + NWCInv – T(SalT – BT) ; SalT-salvage value on termination date, BT-book value on termination date
The equivalent annual annuity is …
The equivalent annual annuity is the annuity payment (series of equal annual payments over the project’s life) that is equivalent in value to the project’s actual cash flows. Analysts find the present value of all of the cash flows for an investment (the NPV) and then calculate an annuity payment that has a value equivalent to the NPV (want to choose highest EAA)
Scenario analysis creates …
Scenario analysis creates scenarios that consist of changes in several of the input variables and calculates the NPV for each scenario
Economic Income =
Economic Income = CF + (E.MV – B.MV) = CF – Economic Depreciation (= the investment’s after-tax cash flow plus the change in market value)
Economic Profit =
Economic Profit = NOPAT - $WACC , NOPAT (net operating profit after tax) = EBIT(1-T), $WACC = WACC*Capital
Initial Outlay =
Initial Outlay = FCInv + NWCInv (= increase in fixed assets + increase in current assets – increase in current liabilities)
Sensitivity analysis calculates …
Sensitivity analysis calculates the effect on the NPV of changes in one input variable at a time
Modigliani-Miller Propositions
Modigliani-Miller Propositions: 1) the market value of a company is not affected by the capital structure of the company; 2) the cost of equity is a linear function of the company’s debt/equity ratio
Without Taxes With Taxes
Proposition I V_L=V_U V_L=V_U+tD
Proposition II r_e=r_0+(r_0-r_d)D/E r_e=r_0+(r_0-r_d)(1-t)D/E
r0 – cost of capital if all equity financed
Static trade-off theory…
Static trade-off theory of capital structure, in choosing a capital structure, a company balances the value of the tax benefit from deductibility of interest with the present value of the costs of financial distress
Cutting a dividend…
Cutting a dividend typically sends a negative signal
Constant dividend payout ratio policy, a company applies a …
Constant dividend payout ratio policy, a company applies a target dividend payout ratio to current earnings (Payout Ratio = Dividend / Net Income)
Expected DPS =
Expected DPS = Previous DPS + (increase in EPS * Target Payout * Adjustment Factor), Adjustment Factor = 1 / # Years Adjustment occur
An agency relationship arises whenever …
An agency relationship arises whenever one party delegates decision-making authority or control over resources to another, the principal is the person delegating authority, and the agent is the person to whom authority is delegated
The board should be comprised of…
The board should be comprised of at least a majority of independent members with the autonomy to act independently from management
