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Corp 2 > All Kmowldege > Flashcards

All Kmowldege Flashcards

1
Q

3 decisions of investment managers

A

Investment principle

Capital structure principle (financing)

Dividend principle

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2
Q

Managers 4 objectives to deal with

A

Shareholders
Bond holders
Society
Financial markets

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3
Q

Managers vs shareholders

A

T: shareholders have complete control over management
R: they use AGM and board of Directors to control management and reduce the separation of ownerships an agency issues. But in reality these methods are not very effective

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4
Q

Managers vs bond holders

A

T. No conflict of interest
P. Bond holders want them to take less risky projects to ensure they receive there payment back

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5
Q

Managers vs financial markets

A

T. Managers releases info all on time, and are rewarded for doing so, in order for the true value of the firm to be evaluated. Short term gimmicky accounting trick do not work and will be punished

P. Managers do withhold information and release it when it is most suitable to the firm, market inefficiencies and asymmetric information

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6
Q

Managers vs society

A

T. All social costs and benefits can be traced back to the firm

P. In reality this is not the case and firm can cause damage and good and not be recognised
Environmental costs - water pollution, dirty energy
Social benefit- increased access points, development, employment in shit areas

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7
Q

NPV

A

Accept project if NPV is positive

Use expected future cash flows and discount them

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8
Q

IRR

A

Accept if IRR is greater than the cost of capital if project

IRR determined when NPV is equal to zero

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9
Q

IRR good

A

IRR is unaffected by scale so good for comparison as it’s a percentage

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10
Q

Why is higher NPV despite having lower IRR

A

Due to growth rate, main cash flows are relatively delayed

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11
Q

IRR failures

A

No IRR at all if NPV always positive or negative

If benefits occur before the cost then NPV is increasing as a function of discount rate

Multiple IRR, if cash flow signs change more than once

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12
Q

Profitability index good

A

If projects scalable then choose project with highest PI and scale project to exhaust BC

If there budget constraint where firm can either do one or the other then, they choose project with highest NPV

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13
Q

PI bad

A

If resources aren’t fully exhausted via PI then choose projects which result in highest NPV

Multiple resource constraints can cause PI ranking to break down

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14
Q

When is deprictiation relevant for cash flows

A

Reduces the taxable profit of the firm

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15
Q

Cannibalism

A

New project affects the sales of a previous project

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16
Q

Opportunity cost s

A

Resources used to generate cash flows if project wasn’t taken

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17
Q

3 ways to analyse projects

A

Break even analysis

Sensitivity analysis

Scenario analysis

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18
Q

Break even analysis

A

Levels where NPV equals zero

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19
Q

Sensitivity analysis

A

Determining what may happen given some shocks and how the NPV may change if assumptions are dropped

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20
Q

Scenario analysis

A

Calculation of probably outcomes based sensitivity analysis

Objective probabilities or subjective probabilities

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21
Q

Cost of capital

A

Weighted average of equity and debt cost

Increases with increased risk

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22
Q

Cost of debt

A

What firm pays on long term borrowing

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23
Q

Cost of equity

A

What investors expect return to be

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24
Q

Investment risk

A

Systematic and unsystematic risk

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25
Q

Company risk

A

Business risk - faced by all equity holders of companies (unstable economy = increased business risk)

Financial risk- only faced by equity holders in leveraged firms (due to d financing being more risky)

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26
Q

Security market line (above/ below)

A

Stock above line then it has excessive return and is undervalued

Stock below line, smaller return and over valued

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27
Q

Why is debt holder risk less than equity holders

A

Debt holders are first to be paid in event of bankruptcy

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28
Q

Intrinsic value

A

Gain/loss that would be made today is option exercise today

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29
Q

Equity as option

A

Equity can be thought of as a call option
With strike price equal to value of debt

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30
Q

What happens if firms assets is less than total debt

A

Then firm doesn’t have money to pay shareholders so stock price goes to zero and firm goes bankrupt

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31
Q

Types of real options

A

Option to delay - value if underlying variable are trending in favourable direction
Expand - value if demand is greater than expected
Abandon - value if demand is less than expected

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32
Q

Payoff for abandon option

A

Value of liquidating assets - value from continuing

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33
Q

Payoff from delayed option

A

Value of project exceeds value of delay

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34
Q

BSM comparison

A

Needs 5 inputs

Restrictive assumptions

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35
Q

Binomial tree model comparison

A

Less restrictive, can alter for early exercise or changing volatility

Have to estimate prices at each branch

Lot of information required

36
Q

Patent real option

A

Gives you the right to produce something not the obligation

If value of project greater than cost of converting into a product is positive then develop

37
Q

Value of firm

A

Discounted future cash flows

38
Q

MM1

A

Value of firm is independent of capital structure

39
Q

MM assumptions

A

No taxes
Effecient markets
No transaction costs
Cost less arbitrage ops
Rational investors
No agency issues
No bankruptcy costs
Price of assets equal to their PV of future cash flows

40
Q

MM2

A

Debt plus equity equals firms assets

Cost of levered equity is equal to unlevered cost of equity plus a premium proportional to the debt to equity ratio of firm

41
Q

Factors that do affect cap structure

A

Financial distress
Taxes
Transaction costs
Agency issues
Asymmetric info

42
Q

Trade off theory

A

Increasing debt can increase tax shield however his comes at cost of increasing financial dirstress

Firms have difficulty repaying debt leading to bankruptcy

43
Q

Financial distress cost a

A

Direct , bankruptcy, legal admin fees, sale of assets under their actual value

Indirect. Impact operations, struggle to raise capital for firm, supply chain becomes uncertain of your position and stops supplying in case they don’t get paid, customers stop buying if they believe they won’t get their warranty

44
Q

Pecking order theory

A

Retained earning s
Debt
Equity

45
Q

Signal of equity issue

A

Signals that they are selling over valued stocks so resulting in average price drop of 3 percent. Bad signal to investors but also suggests that there are profitable opportunities out there

46
Q

Debt signal

A

No signal with debt

47
Q

Pecking order theory assumptions

A

Managers act in interests of shareholders

Asymmetric information about true value of firm between public and management

48
Q

Cap structure in practice

A

Most uk companies have high debt equity ratios

Different firms tend to have different ratios

Some similarities in ratios if same industry, age, product, size, growth prospects

49
Q

Dividend dates

A

Declaration date

Ex dividend date

Record date

Payable date

50
Q

How do firms pay dividend

A

Cash

Stock split issue dividends in the form of shares not cash

51
Q

Reasons for stock repurchase

A

Want to change debt to equity ratio
Other way of paying dividend to potentially reduce tax paid by investor
So they can provide shares if employees exercise their options

52
Q

Types of stock repurchase

A

Open market
Dutch auction
Tender offer
Green mail
Targeted

53
Q

Dividend irrelevancy policy

A

Perfect capital markets and holding investment policy fixed, dividend
Policy is irrelevant and does not affect initial share price

If firms want to increase dividend then they have to issue shares to finance it

54
Q

Bird in hand

A

Investors are naturally risk averse and would rather the certainty of a dividend than the uncertainty of capital gains so prefer increased dividends

Firms with increased dividends usually higher in value

55
Q

Clientele effect

A

When the dividend policy of a firm attempt to match that of the preferences of their investors.

High taxed individuals want buyback but low taxed individuals want dividends

56
Q

Percentages of types of investor

A

Individual 52% , prefer buy back

Institutional - 47% no preference

Corporations -1% dividends

57
Q

Drips.

A

Dividend reinvestment plans

Allow investors to use their dividends to purchase equity in the firm at a discounted rate, usually 2-10%

Good for firm as they can determine tax preference of investors. Also if they have struggle raising capital.

As those who don’t need regular income would opt for DRIP instead

58
Q

Signalling effects

A

Under asymmetric info ,
Investors assume changes in dividend policy reflect the firms anticipated future earnings

59
Q

Examples of signals

A

Increase dividend - increased confidence.
Smooth payout
Special dividends
If they reduce dividends, produce adequate information on why.
Target dividend policy on long run expected earnings not short run

60
Q

Merger

A

When two firms usually of similar size come together to form a new entity, each set of shareholders must agree to this

61
Q

Acquisition

A

When one firm usually larger decides to buy another firm l this is paid for in cash or stocks

62
Q

Conglomerate acquisition

A

Where firm acquires another in a completely seperate industry to their own

Tesla twitter
EBay PayPal

Do this to potentially be able to access different markets ( financial)

Leads to economies in provision of company wide services like head office administration

Also potentially results in firm learning operation of the other which can improve overall operations

63
Q

Vertical m and a

A

Where firm decides to purchase a different part of the supply chain

IKEA and Baltic forests

Means they have more supply chain control and cost management

64
Q

Horizontal m and a

A

When one firms purchases firm in same industry as itself

Disney and 21st century fox -

Do this to increase market power and reduce competition, all other firms also benefit from reduced competition

Economies of scale,

Market power

Synergies

65
Q

Main motive for m and a

A

Managers be,I’ve they can further maximise value of firm through this process

Value release, usually due to poor management, firm is undervalued and with merger true value can be recognised

Value creation

From the combination of the two firms means additional value can be created called synergies

66
Q

Causes of synergy

A

Revenue enhancement
Cost reductions
Lower cap requirements
Lower taxes

67
Q

Revenue enhancement

A

Marketing gains;
Increased advertising,
Increased distribution network
More product mix

Strategic benefits
Increased network
Increased development

Increased market power

68
Q

Cost reductions

A

More efficient company
Asset can be reallocated to where they are needed
Departments can merge and fire employees
Expertise transfer
Economies of scale and

69
Q

Lower tax

A

Increased debt capacity and can use losing divisions to offset taxes

70
Q

Other motives for m and a

A

Diversification of income stream s

Asset allocations

Debt capacity and lower borrowing costs

Increase liquidity

Managerial motives and added status by managing larger firm

Earnings growth

71
Q

Takeover defenses general

A

Poison pill
Golden parachute

72
Q

Pre bid takeover defense

A

Improve operational effeiciency
Good investor relations
Staggered board. Third up for election each year and need two thirds for majority, ensure acquirer must win votes two years in a row before they have control

73
Q

Post bid defense

A

Reject initial bid to show confidence

Recapitalisation, increase dividends to shareholders or buyback shares, this reduces cash in firm so less attractive, also raise share price so cost of acquisition is higher

Sell assets so firm less attractive

White knight , friendly investor

White squire , passive investor with special voting rights

74
Q

Proxy fight

A

Acquiring firm attempts to use proxy votes in order to dethrone the board to put its own board members in to assist with hostile takeover

75
Q

Why bids fail

A

High financial adviser fees

Asymmetric info between firms

Lack of integration between firm

High costs and over paying

Over confidence of the manger and its expected cash flows

76
Q

IPO

A

Shares of a company are issued to the public for the first time.

77
Q

Mechanisms of IPO

A

Underwriter/syndicate
Sec filings
Valuations
Pricing and risk management

78
Q

How ipo done

A

Primary secondary
Dutch auction
Firm commitment
Best effort

79
Q

Largest ipo

A

Glencore international

80
Q

CSR

A

When firms go beyond their interest to appear to be doing some social good which is required by law, work with employees p, families , local communities to improve quality of life.

81
Q

How to measure CsR

A

Index
Money spent

82
Q

Example of CSR index

A

FTSE4GOOD INDEX
Focuses on ESG

DOW JINES SUSTAINABILITY INDEX

83
Q

Traditional behaviour of Corp finance

A

Investors and consumers are rational

Max value

84
Q

Modern behavioural view CF

A

They are bias

85
Q

Psychological biases

A

Excessive optimism
Better than average
Confirmation bias
Illusion control

86
Q

Where can managerial overconfidence play into

A

Investment decisions - accept negative NPV projects
Dividend policy - retain earnings for bad projects and decrease value of firm
Cap structure - too much debt leading to financial distress

Corp 2 (1 decks)

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