"Points Covers in Corporate Finance "
•Valuation and Cost of capital
•Capital budgeting
•Capital structure, financing and dividend policy
•Working capital
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"Points Covers in Corporate Finance "
Replies (16)
Valuation
Generalised valuation
Arbitrage and value additivity
Patterns
Level perpetuity
Growing perpetuity
Level annuity
Growing finite cash flow
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)
Valuation: Straight Bonds
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
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
•Multiple stages
Supernormal stage plus PV of normal growth
•Free cash flow
NOI approach
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
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
•Contingent cash flow
Call/Put
American/European
Binomial
Black-Scholes
Underlying asset price, Exercise Price, Risk-free rate, Volatility, Time
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]
•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
•NPV assumes “now or never”
•Real Option framework
Abandonment
Follow-up
Wait and learn
Flexibility
•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
•MM Does not matter
•Lintnerbehavioural model
DIV1-DIV0=Adjustment rate*(target ratio*EPS1-DIV0)
•Agency
costs/signalling
•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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