"Points Covers in Corporate Finance "

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Guest

•Valuation and Cost of capital

•Capital budgeting

•Capital structure, financing and dividend policy

•Working capital

Replies (16)

Guest

Valuation

Generalised valuation

Arbitrage and value additivity

Patterns

Level perpetuity

Growing perpetuity

Level annuity

Growing finite cash flow

Guest

Valuation

Growing finite [t years] cash flow

C1/(r-g){1-(1+g)t/(1+r)t}

•Compounding intervals (1+r/m)m-1

Continuous compounding

•Stated and effective rates

•Nominal and real rates

1+rnominal=(1+rreal)(1+inflation rate)

Guest

Valuation: Straight Bonds

•YTM

•Duration

Sensitivity of value to changes in interest rates

[1*PV(C1)/V]+[2*PV(C2)/V]+[3*PV(C3)/V]

@ V/V = @ (1+r)/(1+r)*D

Guest

Valuation: Common Stock

•Perpetual growth models

Sustainable growth

P0=No-Growth +PVGO

No-growth =EPS1/r

PVGO=NPV1/(r-g)

where NPV1 =-INV1 +INV1*ROE/r

g=Ploughback*ROE

EPS1/P0 interpretation

Guest

•Multiple stages

Supernormal stage plus PV of normal growth

•Free cash flow

NOI approach

Guest

Cost of Capital

•Security return and standard deviation

•Portfolio return and standard deviation

•Diversification Portfolio variance=

1/N Average Var+(N-1)/N Average covariance

•Systematic and unsystematic risk

•CAPM

•Opportunity cost of capital r [rA]and

Guest

Cost of Capital

1. VL = VU +Tc*D

2. WACC = D/V * (1-Tc) * rD+E/V * rE [Definition of WACC]

3. rE= rA + (rA - rD ) * (1- Tc) * D/E [MM Proposition II]

4. bE = {1+ (1- Tc) * D/E} *bA [If debt is risk free]

5. rE= rf + (rM - rf) *bE [CAPM]

6. WACC= rA *(1- Tc * D/V) MM

Guest

•Contingent cash flow

Call/Put

American/European

Binomial

Black-Scholes

Underlying asset price, Exercise Price, Risk-free rate, Volatility, Time

Guest

Capital Budgeting

•NPV and IRR not payback and accounting rate of return

•Accept/reject single project use NPV or IRR, unless no/multiple IRR

•Mutually exclusive projects: Same life and risk

Use NPV [or IRR of difference between projects]

Guest

•Mutually exclusive projects: Different lives same risk

Use NPV-assumes replacement projects have zero

•Incremental nominal cash flows with empirically measured discount rate

•Components of cash flow

Investment in fixed assets, salvage value

Investment in working capital, release

Operating revenues/expenses

NO INTEREST

NPV. OK for projects with long lives

Use NPV-with specific replacements that make project with comparable lives

Use replacement chain or EAC

Care: Use only real cash flows for EAC

Guest

•NPV assumes “now or never”

•Real Option framework

Abandonment

Follow-up

Wait and learn

Flexibility

Guest

•Market Efficiency

•MM-1 No taxes

•MM-2 Corporate taxes

•Miller Both corporate and personal taxes

GL= {1-(1-TC)*(1-TpE)/(1-Tp)}

•Bankruptcy

costs

•Agency costs

Guest

•MM Does not matter

•Lintnerbehavioural model

DIV1-DIV0=Adjustment rate*(target ratio*EPS1-DIV0)

•Agency

costs/signalling

Guest

•Operating cycle,

cash

conversion cycle, weighted cycles and supply chain management

•Investment in receivables

•Cash management

EOQ and Miller-Orr models

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