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CFA L2 Matheus > 1. Corporate Finance > Flashcards

1. Corporate Finance Flashcards

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1
Q

Modigliani Miler Proposition #1

A

No Tax: Capital Structure does not affect the Value of the Firm (Vlev = V unlev)

Tax: 100% Debt is NICE (Vlev = Vunlev + tD)

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2
Q

Modigliani Miller Assumption

A
  • Homogeneous Expectations
  • Perfect Capital Markets (no tax, no bankruptcy)
  • Risk Free Rate
  • No Agency Costs (monitoring, bonding)
  • Independent Decisions
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3
Q

Modigliani Miller Proposition #2

A

No Tax: Higher Leverage increases Ke and offsets any debt effect. WACC not affected.
- Equation: Re = Ro + [(Ro - Rd) * D/E] and WACC is constant

W/ Tax: WACC is minimized @ 100% debt, even though more leverage increases Ke
Equation: Re = Ro + [(Ro - Rd) * D/E] * (1-t)

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4
Q

Modigliani Miller w/ Taxes

A

Equation: V(lev) = Vunlev + tD - FD

Equation 2: Re = Ro + [(Ro - Rd)*(1-t)] * D/E

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5
Q

Agency Costs

A
  • Managers v. Shareholders
    1) Monitoring (Auditor, BoD, Watching)
    2) Bonding (Non-compete, Insurances Performance)
  • Residual Losses (Since 1 & 2 are not perfect)
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6
Q

Static Trade-Off Theory

A

From a certain point, adding debt will increase WACC, despite the tax shield provided by debt

Equation: V(lev) = Vunlev + tD - FD

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7
Q

Common Law

A
  • Less Debt, More Equity
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8
Q

Civil Law

A
  • More Debt, Less Equity
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9
Q

Consequences (Inflation, GDP)

A
  • High inflation and low GDP worsen long-term investments
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10
Q

Dividend Types

A

1) Regular (may include DRP)
2) Extra / Special
3) Liquidating
3) Stock Dividend

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11
Q

DRP (Div Type)

A
  • Div Cash -> Reinvestment
  • Do NOT dilute EPS (if bought @ market price)
  • Issuance
  • Pros: empowerment of minorities, cheaper (no flotation), no transaction costs for participants
  • Cons: more work record keeping, cash is STILL taxed
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12
Q

Dividend Impact in Balance Sheet

A
  • Lower Cash

- Higher Leverage

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13
Q

Stock Split (Impacts)

A
  • More qtd of shares

- Lower EPS and Dividend per Share

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14
Q

Equation V(unlev)

A

Equation: V(unlev) = EBT (1-t) / WACC

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15
Q

Calculate Re (cost of equity) after buyback

A

Re = Ro + [(Ro-Rd)*(1-t)] * Debt / Equity after Buyabck

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16
Q

Stock Dividend (Div Type)

A
  • NO chg in value
  • NO chg in % ownership
  • NO chg in leverage because mkt value of equity does not change
  • Cost PER share will be lower (but TOTAL cost remains flat)
  • MORE liquidity
  • LESS volatility
  • ↓ Price
  • ↓ Retained Earnings
  • ↑ Contributed Capital
  • ↓ EPS = ↑ Qt of Shares
  • PRICE drops by [D*(1-td)]/(1-tcg)]
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17
Q

Stock Split (Div Type)

A
  • Similar to stock dividend (non-cash)

- Does not affect P/E (double qtd of shares, so half of price, but also half of EPS)

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18
Q

Dividend Irrelevance

A
  • If no tax, no transaction costs, no agency costs, no info assymetry
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19
Q

Bird in Hand Theory

A
  • Investors prefer money in hand
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20
Q

Tax Aversion in Dividends (Implications)

A
  • If Tcapgains < Tdiv, prefer capgains
  • If Tcapgains > Tdiv, prefers CASH
  • If Tcapgains = Tdiv, prefers CASH
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21
Q

Dividend Signs

A
  • Dividend Initiation: ambiguous
  • Unexpected Dividend Increase: revenues are strong
  • Dividend Decrease: revenues are bad
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22
Q

Agency Costs

A
  • Shareholders v. Mgrs: over or underinvestments due to preferences over less/more payout
  • Shareholder v. Bondholder: Fight for CASH (payout, interest payment)
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23
Q

Factors affecting dividend policy

A
  • Investment Opportunities
  • Volatility of future earnings
  • Financial flexibility (need for cash)
  • Tax considerations
  • Flotation costs
  • Legal (covenants etc)
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24
Q

Tax Systems (Types)

A
  • Double Taxation (@ corporate + @ individual)
  • Split Rate (different rates for retained or distributed). Divs still taxed twice, but @ lower levels in comparison to Double
  • Imputation (pay @ corporate, but due @ individual)
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25
Q

Stable Dividend

A
  • Changes are only allowed when SUSTAINED earnings increased
26
Q

Target Payout Adjustment Model

A

Δ Increase = [(Lucro t1*Payout Novo) - Atual Div] * (1 / n)

27
Q

Share Repurchase Methods

A
  • Open mkt (vai a mercado e já era)
  • Fixed price tender offer (Banco Inter)
  • Dutch Auction (selects range, bids until all order is cleared @ higher price for all)
  • Direct negotiation
28
Q

Wealth for Shareholders from Cash Dividend (Formula)

A

Equation: (mkt value - cash)/#shares + div/#shares

29
Q

EPS effect from repurchase

A

EPS dps = NI antes - cash / #qtd menor shares

30
Q

Repurchase / Buyback Effects

A

Internal Funds = ↑ EPS (NI/#menos shares)
External Funds = ↑ EPS if Kd after-tax < E/P

Effect BVPS:
If Precompra > Pbefore = ↓ BVPS
If Precompra < Pbefore = ↑ BVPS

31
Q

Dividend Trends Nowadays

A
  • Adapt to investor preferences
  • ↓ Cash dividends
  • ↑ Repurchases (US, Europe)
32
Q

DPR (Payout)

A

DPR = Div / NI

33
Q

Coverage (DCR)

A

DCR = NI / Div

34
Q

FCFE Coverage

A

FCFE Coverage = FCFE / (Div + Repurchase)

35
Q

Dividend Yield

A

Div Yield = Div / Price

36
Q

Governance: disperse ownership v. disperse voting

A
  • Weak shareholders

- Strong managers

37
Q

Governance: concentrated owner v. concentrated voting

A
  • Strong shareholders

- Weak managers

38
Q

Governance: disperse owner v. concentrated voting

A
  • Weak minorotários
39
Q

Governance: concentrated owner v. disperse voting

A
  • Results from shareholders w/ restrictions
40
Q

Stewardship Codes

A

Voluntary Codes

41
Q

ESG approach to fixed income v. equity

A

Fixed Income: worries on the downside risks

Equity: worries on upside/downside risks

42
Q

M&A integration types

A
  • Statutory = (Assets + Liabilities) = Spoonrocket
  • Subsidiary = Gilette and P&G
  • Consolidation = ITUB4
43
Q

M&A merger types

A
  • Horizontal (similar businesses)
  • Vertical (same supply chain, backward supplier or forward distributor)
  • Conglomerate (diversification)
44
Q

Bootstrap Earnings

A
  • High P/E firm issues shares with low book value but high prices to acquire real book value shares w/ lower prices
  • ↑ EPS, but should converge to weighted average
  • Diff stages, diff business (similar sectors trade @ similar stock prices and multiples)
45
Q

M&A buying stocks (advantages)

A
  • Shareholders receive
  • You can bypass mgmt and directly buy shares
  • Shareholders pay taxes on the deal liquidation
46
Q

M&A buying assets (advantages)

A
  • If >50% it will need shareholders
  • If <50% it just needs management
  • Target pays taxes on the income received
47
Q

Pre-Deal Defense

A
  • Poison pill (flip IN buying target or flip over buying acquirer)
  • Poison put (cláusula de vencto antecipado)
  • Restricted vvoting
  • Supermajority rules
  • Staggered board
  • Golden parachutes
48
Q

Post-Deal Defense

A
  • Say no
  • Litigation
  • Greenmail (calaboca $)
  • Repurchase of shares
  • Recapitalize w/ debt
  • Crown Jewel (may be subject to litigation)
  • Pacman (offer to buy acquirer)
  • Knight (bid war via friend)
  • Squire (minority stake purchase via friend)
49
Q

Bear Hug

A
  • Go directly to the BoD

- If they refuse,

50
Q

M&A Valuation - DCF (Pros and Cons)

A

Pros: easy to customize

Cons: DCFs may be negative, usual errors, chg of WACC across time brings inconsistency

51
Q

M&A Valuation - Multiples (Pros and Cons)

A

Pros: data access is easy, similar assets

Cons: gives fair price stock but not a fair takeover price

  • hard to incorporate in the analysis
  • timing and demand
52
Q

Takeover Premium (Formula)

A

TP = (DP - SP) / SP

53
Q

Acquirers Gains (Formula)

A

Gacquires = S - (Pdeal - Pantes)

54
Q

Target Gains (Formula)

A

Gtarget = (Pdeal - Pantes)

55
Q

Value A+T (Formula)

A

Vat = Va + Vt + S - Cash

56
Q

Conditions to create value in a M&A

A
  • Strong buyer, low premiums, few bids, good market reaction
57
Q

Target Possibilities

A
  • Carve-out (create new tax ID + IPO in the future)
  • Spin-off (Getnet)
  • Split-off (Shareholders may exchange shares in the parent for shares in the Newco)
  • Liquidation
58
Q

Cashflow Estimations

A
  • Initial Layout = FCInv + NWC Inv
  • Op. Inflow = [(S - C - D)*(1-t)] + D
  • TNOCF = Sal(t) + NWC Inv - [t* (lucro na venda)]
59
Q

MACRS 10y (scheme)

A

Depreciate 10% in Y0,5

Depreciate higher in volume between (linear, 20%)

60
Q

How to evaluate mutually exclusive projects

A
  • Calculate NPV for MMC

- Find each project NPV and use as PV, find EAA (PMT)

61
Q

Real Options (Types)

A
  • Timing
  • Sizing
  • Flexibility (price-setting or production-flexibility)
  • Fundamental (PETRO)
62
Q

Scenarios

A
  • Scenario (base, best, worst case)
  • Sensitivity (chg one input)
  • Monte Carlo (distribution of NPV outcomes)

CFA L2 Matheus (9 decks)

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