Corp Fin# Flashcards
Herfindahl-Hirschman Index (HHI)
Sum(squared(each mkt share))
Assume same Premerger EPS b/w target & acquirer. Calculate #shares issued and post merger EPS
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)
Calculate Post Merger EPS
Sum(NI)/Sum(acquirer existing shares, newly issued shares)
Target shareholder’s gain (takeover premium)
Takeover prem = (Purchase price) - prevalue(target)
Total gains = value(A,B) - prevalue(A;B)
Acquirer’s gain
Synergies - takeover premium
Synergies - (purchase price - premerger value)
Post merger value
Post merger value = premerger value(acquirer) + Premerger value(target) + synergies - cost
Calculate # of shares issued for acquisition.
MV of target/current acquirer’s share price
Expected decrease in share price when goes ex-dividend
Pw - Px = [(1-Td)/(1-Tcg) ]*D$
Pw: share price with div right Px: share price w/o div right D$: div amt Td: tax rate on div Tcg: tax rate on capital gains
Effective tax rate
ETR = CTR + (1-CTR)*(MTRd)
ETR: effective tax rate
CTR: corporate tax rate
MTRd: investor’s marginal tax rate on div
Stable dividend policy
E(div chg) = ($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)
FCFF approach
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
Residual Dividends
Div = NI - EQ% of capital budget
Capital budget: FCInv spending for the year
Dividend coverage ratio
NI/Dividends
FCFE coverage ratio
FCFE/(dividends + share repurchases)
WACC
Rwacc = (D/V)(Rd)(1-t) + (E/V)*Re
Value of firm
Value = debt + equity
MM2 (w/o taxes)
Re = Ro + (Ro - Rd)*(D/E)
MM1 (w/o taxes)
Vu = VL
MM2 (w/o taxes): equity beta
Beta(E) = Beta(A) + [Beta(A) - Beta(D)]*(D/E)
Equity beta increases as D/E ratio increases
MM1 (with taxes):
VL = Vu + (D)*(t) E = Vu - D
MM2 (with taxes)
Re = Ro + (Ro - Rd)(1-t)(D/E)
Value of unlevered firm
Vu = [EBIT(1-t)]/Rwacc
Value of levered firm
VL = (interest/Rd) + [(EBIT - interest)*(1-t)]/Re
Value of leveraged firm after accounting for costs of financial distress
VL = VU + (t)*(D) - PV(costs of financial distress)
Expected amt of capital available for project investment
1 + [(%debt financing)/(%eq financing)]*(eq portion from expected earnings left for project investment)
Expansion Projects
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
Replacement projects
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)
Least common multiple of lives approach
Find the LCM of the duration of the 2 projects
Compare NPVs
Equivalent Annual Annuity Approach (EAA)
Calculate NPV of project
Then compute PMT in TVM
Profitability Index
PI = 1 + (NPV/investment outlay)
Economic Income
= 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
Economic Profit
= [(EBIT)*(1-t)] - $WACC
= NOPAT - $WACC
Where $WACC = (WACC)*(beg yr capital)
Result should equal NPV
Calculate NPV via Economic Profit
NPV = MVA = sum
Claims valuation method
Debt pmts = sum(interest, principal)
All CFs after distributed to shareholders
NPV of each source of financing
Value(firm) = sum of each
Real cost of equity
= [(1+nominal Re)/(1+ inflation rate)] - 1
Net Tax Effect
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
Cash vs Stock
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)
Value of new shares
Value(new shares) = { Value(A,B) + cash for stock)/(old + new shares) }*(#of new shares)
Project with real options
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
Higher depreciation expense earlier on in a project
Has PV(tax shield benefits)
