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Corporate Finance > Test 1 > Flashcards

Test 1 Flashcards

1
Q

FV equation

A

FV = PV*(1+r)^t

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2
Q

What must the frequency of cash flows match?

A

The frequency of the discount rate (must convert monthly cash flows)

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3
Q

Annuity

A

A stream of CFs that eventually end

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4
Q

Annuity assumptions

A

First CF comes in 1 period
CFs are constant
There is a fixed endpoint

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5
Q

Perpetuity

A

A constant stream of CFs that doesn’t end

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6
Q

What is the value of financial securities equal to?

A

The PV of expected FCFs

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7
Q

Yield to Maturity (YTM)

A

The interest rate that sets the PV of bond cash flows equal to its price

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8
Q

How are Yields and bond prices related?

A

Inverseley

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9
Q

r=D1/P0 +g (dividend growth model)

A

Dividend Yield plus Growth Rate of Dividend

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10
Q

Retention Rate

A

Proportion of earnings that are reinvested

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11
Q

Dividend Growth equation

A

Retention rate * Return on New Investment

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12
Q

Cost of Capital

A

Expected rate of return that investors require based on firm risk

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13
Q

Cost of capital must be qual to what?

A

Opportunity cost of capital

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14
Q

Is Cost of Capital WACC?

A

Yes

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15
Q

Cost of Equity

A

The return that stockholders require

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16
Q

2 ways to calculate cost of equity

A

Dividend Growth Model
CAPM

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17
Q

Beta

A

measures how sensitive returns are to movements in the overall market

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18
Q

CAPM

A

shows the relationship between systematic risk and the expected return

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19
Q

What do stock betas represent?

A

Systematic Risk

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20
Q

Operating Leverage

A

Sensitivity of profits to the firms fixed costs of production

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21
Q

Financial Leverage

A

The proportion of the firm financed through debt

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22
Q

Cost of debt equation

A

rd = YTM(1-tax)

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23
Q

Asset Beta is also called

A

Unlevered Beta

24
Q

Capital Structure

A

The sources of financing that a firm uses

25
Q

PV of Int Tax Shields equation

A

(taxdebtrd)/rd or tax*debt

26
Q

Debt Overhang

A

When too much debt can lead firms to bypass positive NPV investments

27
Q

Financial Distress Costs

A

The costs associated with having too much debt

28
Q

Indirect financial distress costs

A

The costs unassociated with bankruptcy but still present when firms have a high level of debt

29
Q

Public companies do the majority of their investing through what type of funds?

A

Internally Generated Funds

30
Q

Firms with tangible assets can use them as what, getting their cost of debt down?

A

Collateral

31
Q

What are the tax benefits of debt limited by?

A

Profitability

32
Q

In growth oriented firms, earnings are what relative to the total firm value?

A

Smaller

33
Q

What is a good benchmark for leverage ratios>

A

If Int/EBIT = close to 1

34
Q

What are the cash flows of unlevered equity equal to when there is no debt?

A

The projects cash flows

35
Q

What does leverage always increase the risk of?

A

Equity

36
Q

Agency Costs

A

Costs that arise when different stakeholders have different objectives

37
Q

Asset Substitution

A

When shareholders can gain at the expense of debt holders by taking a negative NPV project

38
Q

Debt Overhang

A

When equity holders dont want to invest in a positive NPV project because the firm is in financial distress and the earning will go to debtholders only

39
Q

Cashing Out

A

When a default it likely so shareholders sell their stocks

40
Q

Out of debtholders and shareholders which one bears the cost of agency problems?

A

Shareholders

41
Q

Managerial Entrenchment

A

When managers make decisions that benefit themselves at the investors expense

42
Q

How can leverage benefit a firm?

A

By preserving ownership concentration and avoiding agency costs

43
Q

Free Cash Flow Hypothesis

A

The hypothesis that leverage increases firm value by reducing excess cash flows to secure money for future interest payments

44
Q

VL equation

A

VL=VU + PV(Int Tax Shield) - PV (Distress Costs) - PV (Agency Costs) + PV (Agency Benefits)

45
Q

Scuttle

A

To abandon the assets at the end of their life

46
Q

Liquidate

A

To sell the assets for their book value and reclaim the NWC at the end of their life

47
Q

Internal Rate of Return (IRR)

A

The annualized percentage return you earn on the project (discount rate that makes the NPV=0)

48
Q

Can we rank projects based off of IRR?

A

No, because IRR doesn’t take into account the scale of projects

49
Q

When is the Payback Method best used?

A

For trivial decisions

50
Q

Important cash flows to include in valuation

A

Money changing hands
Opportunity Costs
Side effects of the project

51
Q

Cash flows to not include in valuation

A

Sunk costs
Noncash flows (depreciation)

52
Q

Are interest and dividend payments calculated as Cash Flows?

A

No

53
Q

NCS sale considerations

A

If MV>BV you pay tax on the difference
If BV>MV you get a tax credit on the difference

54
Q

EAC simple equation

A

OG purchase price + recurring cost (PVIFA)

55
Q

What does VL stand for?

A

Levered Value

56
Q

VL equation

A

FCF1/1+rwacc + FCF2/(1+rwacc)^2…

57
Q

Debt Capacity

A

The amount of debt at a particular date that is required to maintain the target debt to value ratio

Corporate Finance (3 decks)

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