Corp Fin#

Question 1

Herfindahl-Hirschman Index (HHI)

Answer 1

Sum(squared(each mkt share))

Question 2

Assume same Premerger EPS b/w target & acquirer. Calculate #shares issued and post merger EPS

Answer 2

Revised share price = Acquirer EPS)*(assumed PE ratio)

Newly issued shares = MV(target)/revised share price

Post merger EPS: sum(NI)/sum(acquirer existing shares, newly issued shares)

Question 3

Calculate Post Merger EPS

Answer 3

Sum(NI)/Sum(acquirer existing shares, newly issued shares)

Question 4

Target shareholder’s gain (takeover premium)

Answer 4

Takeover prem = (Purchase price) - prevalue(target)

Total gains = value(A,B) - prevalue(A;B)

Question 5

Acquirer’s gain

Answer 5

Synergies - takeover premium

Synergies - (purchase price - premerger value)

Question 6

Post merger value

Answer 6

Post merger value = premerger value(acquirer) + Premerger value(target) + synergies - cost

Question 7

Calculate # of shares issued for acquisition.

Answer 7

MV of target/current acquirer’s share price

Question 8

Expected decrease in share price when goes ex-dividend

Answer 8

Pw - Px = [(1-Td)/(1-Tcg) ]*D$

Pw: share price with div right
Px: share price w/o div right
D$: div amt
Td: tax rate on div
Tcg: tax rate on capital gains

Question 9

Effective tax rate

Answer 9

ETR = CTR + (1-CTR)*(MTRd)

ETR: effective tax rate
CTR: corporate tax rate
MTRd: investor’s marginal tax rate on div

Question 10

Stable dividend policy

Answer 10

E(div chg) = ($chg in earnings)(target payout ratio)(adj factor)

Adj factor = 1/#yrs the adj is expected to occur

E(div) = last dividend + E(div chg)

Question 11

FCFF approach

Answer 11

Net income
\+ after tax(net interest)
= unlevered income
\+ changes in deferred taxes
= NOPLAT (net op profit less adj taxes)

+ net noncash charges
- chg in NWC
- capex
= FCFF

Question 12

Residual Dividends

Answer 12

Div = NI - EQ% of capital budget

Capital budget: FCInv spending for the year

Question 13

Dividend coverage ratio

Answer 13

NI/Dividends

Question 14

FCFE coverage ratio

Answer 14

FCFE/(dividends + share repurchases)

Question 15

WACC

Answer 15

Rwacc = (D/V)(Rd)(1-t) + (E/V)*Re

Question 16

Value of firm

Answer 16

Value = debt + equity

Question 17

MM2 (w/o taxes)

Answer 17

Re = Ro + (Ro - Rd)*(D/E)

Question 18

MM1 (w/o taxes)

Answer 18

Vu = VL

Question 19

MM2 (w/o taxes): equity beta

Answer 19

Beta(E) = Beta(A) + [Beta(A) - Beta(D)]*(D/E)

Equity beta increases as D/E ratio increases

Question 20

MM1 (with taxes):

Answer 20

VL = Vu + (D)*(t)
E = Vu - D

Question 21

MM2 (with taxes)

Answer 21

Re = Ro + (Ro - Rd)(1-t)(D/E)

Question 22

Value of unlevered firm

Answer 22

Vu = [EBIT(1-t)]/Rwacc

Question 23

Value of levered firm

Answer 23

VL = (interest/Rd) + [(EBIT - interest)*(1-t)]/Re

Question 24

Value of leveraged firm after accounting for costs of financial distress

Answer 24

VL = VU + (t)*(D) - PV(costs of financial distress)

Question 25

Expected amt of capital available for project investment

Answer 25

1 + [(%debt financing)/(%eq financing)]*(eq portion from expected earnings left for project investment)

Question 26

Expansion Projects

Answer 26

Initial outlay = FCInv + NWCinv
Where NWCinv: (chgs in noncash CA) - (chgs in nondebt CL)

Annual after tax CFO = (sales - cash op exp - dep)(1-t) + (dep)
= (sales - cash op exp)(1-t) + (t*dep)

Terminal yr after tax CFO = (SV + NWCinv) - (t)*(SV-BV)

Financing cost not considered in CF, reflected in discount rate

Question 27

Replacement projects

Answer 27

Initial outlay = FCInv + NWCinv - SV + (t)*(SV-BV)

Chg in After tax CF = (chg sales - chg cash op exp)(1-t) + (t)(chg dep)

Terminal = (SV + NWCinv) - (t)*(SV-BV)

Question 28

Least common multiple of lives approach

Answer 28

Find the LCM of the duration of the 2 projects

Compare NPVs

Question 29

Equivalent Annual Annuity Approach (EAA)

Answer 29

Calculate NPV of project

Then compute PMT in TVM

Question 30

Profitability Index

Answer 30

PI = 1 + (NPV/investment outlay)

Question 31

Economic Income

Answer 31

= after tax CFO + chgs in MV
= after tax CFO + (end mv - beg mv)
= after tax CFO - Economic depreciation

DO NOT INCLUDE OUTLAY TO FIND MV
MV(t) = PV of remaining CFs @ WACC

Question 32

Economic Profit

Answer 32

= [(EBIT)*(1-t)] - $WACC
= NOPAT - $WACC

Where $WACC = (WACC)*(beg yr capital)

Result should equal NPV

Question 33

Calculate NPV via Economic Profit

Answer 33

NPV = MVA = sum

Question 34

Claims valuation method

Answer 34

Debt pmts = sum(interest, principal)
All CFs after distributed to shareholders

NPV of each source of financing
Value(firm) = sum of each

Question 35

Real cost of equity

Answer 35

= [(1+nominal Re)/(1+ inflation rate)] - 1

Question 36

Net Tax Effect

Answer 36

tax on (chgs in revenue - chgs in expenses) is a tax deduction

tax on (depreciation) is a tax shield

Net tax deduction & tax shield to get net tax effect

Question 37

Cash vs Stock

Answer 37

Value(A,B) via cash = Value (A,B)

Value (A,B) via stock = Value(A,B) + cash for stock

of shares outstanding = (Ashares) + (new shares)

Question 38

Value of new shares

Answer 38

Value(new shares) = { Value(A,B) + cash for stock)/(old + new shares) }*(#of new shares)

Question 39

Project with real options

Answer 39

Project NPV(with option) = Project NPV(wo option) - (option cost) + (option value)

A real option adds value to a project, even if it is difficult to determine the monetary amt of that value

Question 40

Higher depreciation expense earlier on in a project

Answer 40

Has PV(tax shield benefits)