Corporate Finance Flashcards
(40 cards)
Cash Flow Equation given S, C, D =
Outlay =
Terminal Non Operating Cash Flow =
Cash Flow = (Sales - Operating Cost - Dep)(1-t) + Dep
Outlay = FCInv + NWCInv - Sale price + Tax x (Sale price - Book value)
TNOCF = Sale price + WCInv - (Tax (sale price - Book value))
Incremental operating cash flow =
Incremental Non-operating cash flow =
Incremental operating cash flow = Change Revenue - change operating costs - change depreciation x (1-t x change depreciation)
Incremental Non-operating cash flow = change salvage value + increase WC - Tax x ( Change salvage - change BV)
IRR cash flows =
NPV and IRR are the same for =
NPV preferred over IRR when =
IRR cash flows = cash flows are reinvested at the IRR
NPV and IRR give same decision for = Independent projects
NPV preferred over IRR when projects are mutually exclusive
China dividends paid:
Japan dividends paid:
China dividends paid: Annually
Japan dividends paid: Semi-annually
Economic Income =
Economic profit =
Economic Income = Cash flow - economic depreciation
Economic Income = cash flow + (ending mkt value - opening mkt value)
Economic profit = EBIT(1-t) - (WACC x Capital) = NOPAT - $WACC
NOPAT = EBIT(1-t) $WACC = Capital x WACC
Residual Income =
Company Value =
Claims valuation approach =
Residual Income = NI - (r x BV Equity)
Company Value = PV of RI + Value of debt + Value of Equity
Claims valuation approach = NPV of debt payments + NPV of dividend payments
NPV of debt payments discounted at interest expense
NPV of dividend payments discounted at r
Modigliani Miller
MM1 without taxes
MM2 without taxes
MM1 with taxes
MM2 with taxes
MM1 without taxes = VLevered = V Unlevere, capital structure is irrelevant as equities and bonds trade perfectly competitve. Income is not related to capital structure
MM2 without taxes = Cost of equity increases linnearly as company increases its proportion of debt financing D/E. Beta increases with debt. Cost of debt is less than equity.
(without taxes WACC stays the same as D/E increases)
MM1 with taxes = company value is maximised at 100% debt
MM2 with taxes = WACC is minimized at 100% debt. i.e. increasing debt finance decreases the WACC.
Free cash flow hypothesis =
Pecking order theory =
Free cash flow hypothesis = Higher debt levels can force managers to manage a company more effectively.
Pecking order theory = Low information content preferred. “IDE”
Internally finance = low info and preferred
Debt = Middle
Equity = High information content least preferred
Static trade off theory =
- Higher tax rate:
Developed Countries with efficient legal system, equity or debt?
Developing countries with High inflation and high GDP growth equity or debt?
Static trade off theory = Seeks to balance cost of financial distress with tax shielf benefit. Higher tax rate = higher tax shield.
Developed = Equity is preferred within efficient legal systems. Long term debt would be preferred if GDP is stable in a mature country.
Developing = Equity is preferred if inflation is high and GDP is strong
Biggest yield changes from:
Moodys Investment grade down to Speculative grade =
S&P Investment grade to speculative grade =
Moodys = Baa to Ba
S&P = BBB to BB
More leverage from
Less leverage from
More leverage from low inflation markets
Less leverage from large institutional investor base with longer maturities. Equity preferred.
Stock dividend
vs
Cash dividend
Stock dividend receives shares rather than cash so is non-dilutive and does not affect leverage.
Cash dividend reduces assets and equity to increase d/e ratio. Reduced liquidity ratios.
Dividend Irrelevance theory =
Bird in the hand theory =
Clientele effect =
Dividend signaling =
Dividend Irrelevance theory = whether you issue new shares or pay dividends is irrelevant as they will exactly offset eachother. cost of equity and payout ratio remain unchanged
Bird in the hand theory = cash in the hand preferred so as payout ratio increases so too does stock price. High dividend payout is considered less risky.
Clientele effect = dividends are preferred by differing groups eg some investors prefer short term income. It tends to lead to stable dividend policies.
Dividend signaling = Dividend signaling acknowledges the existence of information asymmetry in that managers and directors have information not available to investors.
Dividend imputation system =
Split rate tax system =
Residual dividend policy =
Dividend imputation system is where shareholders receive a franking credit and investors are only taxed once on income
Split rate tax system is where corporate earnings can either be paid or retained. those PAID are taxed at a lower rate of corporate tax.
Residual dividend policy is where leftover positive NPV projects are paid in dividends.
Expected dividend equation =
Earnings Yield =
FCFE coverage ratio =
Expected dividend = Previous dividend + (Expected earnings x target payout ration - previous dividend) x 1/adjustment period
Earnings Yield = NI / market value of all shares
FCFE coverage ratio = FCFE / Dividends + share repurchases
Dividend payout ratio =
Common share cash dividend / NI = Dividend / EPS
40% debt 60% equity Net income 14m capital budget 12m dividend paid in cash?
12 x 0.6 = 7.2
14 - 7.2 = 6.8m for dividends
Checking if a buyback from debt is worth it?
EPS is positive if
EPS is negative if
Check Earnings Yield vs cost of debt
EPS is positive if E/P > cost of debt = No earnings dilution
EPS is negative if E/P < cost of debt = EPS dilution will occur (cost of debt exceeds earnings yield)
EPS after buyback =
EPS after = Total earnings - after tax cost of funds / shares outstanding after buyback
Following a buyback
BVPS > Market price =
BVPS < Market price =
BVPS > Market price = Following buyback BVPS will increase
BVPS < Market price = Following buyback BVPS will decrease
Buy Back techniques
Fixed price tender offer
Vs
Dutch Auction
If current price is $42
Fixed price tender offer = $44 (frowned upon to offer below this level)
Vs
Dutch Auction = $42 - $46 and will uncover a minimum price a company can buy back shares.
Statutory Merger
Consolidation
Subsidiary Merger
Statutory Merger one company will cease to exist.
Consolidation companies form a new business and terminate legal existence of old brands.
Subsidiary Merger where purchased company becomes subsidiary.
Horizontal Merger
Vertical Merger
Merger bootstrapping
- PE must be higher/lower to increase share price?
Horizontal Merger = Same industry company (usually competition) merges can help boost sales easier.
Vertical Merger = Merger with a supplier
Merger bootstrapping = Increasing EPS without economic gain. PE of acquirer must be higher to increase share price.
Which companies prefer a horizontal merger?
Least preferred?
Stable growth to benefit from economies of scale.
Pioneering stage companies
Least preferred for young and growing companies.
