1. Corporate Finance Flashcards
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)
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
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)
4
Q
Modigliani Miller w/ Taxes
A
Equation: V(lev) = Vunlev + tD - FD
Equation 2: Re = Ro + [(Ro - Rd)*(1-t)] * D/E
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)
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
7
Q
Common Law
A
- Less Debt, More Equity
8
Q
Civil Law
A
- More Debt, Less Equity
9
Q
Consequences (Inflation, GDP)
A
- High inflation and low GDP worsen long-term investments
10
Q
Dividend Types
A
1) Regular (may include DRP)
2) Extra / Special
3) Liquidating
3) Stock Dividend
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
12
Q
Dividend Impact in Balance Sheet
A
- Lower Cash
- Higher Leverage
13
Q
Stock Split (Impacts)
A
- More qtd of shares
- Lower EPS and Dividend per Share
14
Q
Equation V(unlev)
A
Equation: V(unlev) = EBT (1-t) / WACC
15
Q
Calculate Re (cost of equity) after buyback
A
Re = Ro + [(Ro-Rd)*(1-t)] * Debt / Equity after Buyabck
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)]
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)
18
Q
Dividend Irrelevance
A
- If no tax, no transaction costs, no agency costs, no info assymetry
19
Q
Bird in Hand Theory
A
- Investors prefer money in hand
20
Q
Tax Aversion in Dividends (Implications)
A
- If Tcapgains < Tdiv, prefer capgains
- If Tcapgains > Tdiv, prefers CASH
- If Tcapgains = Tdiv, prefers CASH
21
Q
Dividend Signs
A
- Dividend Initiation: ambiguous
- Unexpected Dividend Increase: revenues are strong
- Dividend Decrease: revenues are bad
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)
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)
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)
25
Stable Dividend
- Changes are only allowed when SUSTAINED earnings increased
26
Target Payout Adjustment Model
Δ Increase = [(Lucro t1*Payout Novo) - Atual Div] * (1 / n)
27
Share Repurchase Methods
- 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
Wealth for Shareholders from Cash Dividend (Formula)
Equation: (mkt value - cash)/#shares + div/#shares
29
EPS effect from repurchase
EPS dps = NI antes - cash / #qtd menor shares
30
Repurchase / Buyback Effects
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
Dividend Trends Nowadays
- Adapt to investor preferences
- ↓ Cash dividends
- ↑ Repurchases (US, Europe)
32
DPR (Payout)
DPR = Div / NI
33
Coverage (DCR)
DCR = NI / Div
34
FCFE Coverage
FCFE Coverage = FCFE / (Div + Repurchase)
35
Dividend Yield
Div Yield = Div / Price
36
Governance: disperse ownership v. disperse voting
- Weak shareholders
| - Strong managers
37
Governance: concentrated owner v. concentrated voting
- Strong shareholders
| - Weak managers
38
Governance: disperse owner v. concentrated voting
- Weak minorotários
39
Governance: concentrated owner v. disperse voting
- Results from shareholders w/ restrictions
40
Stewardship Codes
Voluntary Codes
41
ESG approach to fixed income v. equity
Fixed Income: worries on the downside risks
| Equity: worries on upside/downside risks
42
M&A integration types
- Statutory = (Assets + Liabilities) = Spoonrocket
- Subsidiary = Gilette and P&G
- Consolidation = ITUB4
43
M&A merger types
- Horizontal (similar businesses)
- Vertical (same supply chain, backward supplier or forward distributor)
- Conglomerate (diversification)
44
Bootstrap Earnings
- 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
M&A buying stocks (advantages)
- Shareholders receive
- You can bypass mgmt and directly buy shares
- Shareholders pay taxes on the deal liquidation
46
M&A buying assets (advantages)
- If >50% it will need shareholders
- If <50% it just needs management
- Target pays taxes on the income received
47
Pre-Deal Defense
- 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
Post-Deal Defense
- 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
Bear Hug
- Go directly to the BoD
| - If they refuse,
50
M&A Valuation - DCF (Pros and Cons)
Pros: easy to customize
Cons: DCFs may be negative, usual errors, chg of WACC across time brings inconsistency
51
M&A Valuation - Multiples (Pros and Cons)
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
Takeover Premium (Formula)
TP = (DP - SP) / SP
53
Acquirers Gains (Formula)
Gacquires = S - (Pdeal - Pantes)
54
Target Gains (Formula)
Gtarget = (Pdeal - Pantes)
55
Value A+T (Formula)
Vat = Va + Vt + S - Cash
56
Conditions to create value in a M&A
- Strong buyer, low premiums, few bids, good market reaction
57
Target Possibilities
- 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
Cashflow Estimations
- Initial Layout = FCInv + NWC Inv
- Op. Inflow = [(S - C - D)*(1-t)] + D
- TNOCF = Sal(t) + NWC Inv - [t* (lucro na venda)]
59
MACRS 10y (scheme)
Depreciate 10% in Y0,5
| Depreciate higher in volume between (linear, 20%)
60
How to evaluate mutually exclusive projects
- Calculate NPV for MMC
| - Find each project NPV and use as PV, find EAA (PMT)
61
Real Options (Types)
- Timing
- Sizing
- Flexibility (price-setting or production-flexibility)
- Fundamental (PETRO)
62
Scenarios
- Scenario (base, best, worst case)
- Sensitivity (chg one input)
- Monte Carlo (distribution of NPV outcomes)
