Capital Investments Flashcards
What is the definition of a capital investment?
Any investment for which the economic benefit is greater than one year.
What are examples of capital investments?
Opening a new factory, Entering a new market, acquiring another business, and research and development of new products.
What are the the two techniques for valuing an investment?
Net Present Value and IRR
What is the definition of Net Present Value?
The value of all future cash flows over the entire life of an investment discounted to the present.
What is the definition of the internal rate of return?
The expected compound annual rate of return that will be earned on a project or investment.
What is the formula for present value?
FV x 1/(1+i)n i = discount rate or cost of capital
What is the definition of terminal value?
Value of free cash flow beyond a forecast period
What are the two formulas to determine terminal value?
Growing perpetuity formula and Exit multiple formula
How do you calculate the Growing Perpetuity Formula?
Free cash flow x (1+growth)/Cost of capital - growth
How do you calculate the exit multiple formula
Financial metric (i.e. earnings, ebitda) X multiple
What are the drivers of free cash flow?
Business strategy, revenue, cost structure, asset utilization
What are the drivers of cost of capital?
Risk, current capital structure, and macro factors
What is the definition of enterprise value and how is it calculated?
Value of entire business, = equity value + Debt - cash also NPV of a business
What is the definition of equity value and how is it calculated?
It is the value shareholders would receive if a company was sold, share price X outstanding shares or NPV of business - debt + cash
What are the benefits of a M&A transaction?
Cost savings, revenue enhancements, increase market share, and enhance financial resources
What are the potential drawbacks?
Overpaying, large expenses associated with the investment and negative reactions to the merger or acquisition
What are steps in 10-step acquisition process
- Acquisition Strat
- Acquisition Criteria
- Searching for a target
- Approaching Targets
- Data & Detailed Valuations
- Negotiation
- Due Diligence
- Purchase & Sales Contract
- Financing
- Integration
What are strategic buyers
Operating businesses
What are financial buyers
Private equity or professional investors looking to maximize equity returns.
What is best practice when acquiring a target
Consideration paid should be less than stand-alone value of business plus net synergies
What are issues in a structuring environment to consider?
- The strategic plan
- Hostile vs. friendly takeover
- The capital structure
- Public vs. Private investment
- Competing Bidders
What are issues to consider in market environment in an acquisition?
- Contract Law
- Accounting Rules
- Tax
- Market Conditions
- Corporate Law
- Available Financing
- Antitrust Laws
