CorpFin bb Flashcards
Does an expansion project effect current cashflows?
No
What is the formula for an intial outlay into a new project?
Fixed investment + Working Capital - Tax (Salvage - BV)
What is the formula for operating cashflows for a new project
(Sales - Depreciation - Expenses)(1-t) + Depreciation
What is the formula for terminal value of a project
Salvage value+ Working capital - (Tax(Salvage-BV)
Which two formulas in the new project cashflow analysis are pretty much the same
Outlay and terminal value. Just substitute fixed investment for salvage value
Miller Malinga propositions . 2 versions
Without tax, corporate structure didn’t matter and wacc is constant.
With tax, you want to be as levered as possible cos debt is tax deductible. Higher debt is lower wacc
Name and describe 4 share repurcahse mediums
Tender (will buy @ x price)
Direct negotitation
Open market
Dutch auction (we wannt buy x shares, everyone offers x shares at a low price, the highest price when the quota for the amount of shares they want repurchased is filled for all shares)
Explain peking order theory
You want to fund projects from internal cash first, t hen debt then equity
What is the static trade of theory?
You want to fund with debt UP UNTIL a point where the optimal capital structure is reached, therefore increasing the firm’s value
Is a high or low WACC better
LOW bb
Why would a firm have different optimal and target capital structures?
A firm may not want beyond a certain level of debt, even if it is to reduce the WACC, and therefore increase the firms’ value
Why does actual capital structure deviate from target or optimal capital structure
Martket movements and the firm exploiting certain opportunities int eh market
Which firms are generally more levered, US or Japan
Japan
Do Japense prefer long or short term debt
Short
Explain types of shares
Normal Div
Special div (given one off)
Stock div - gives stock instead of cash
Liquidating Div - when a firm dies, special div
Stock split - turns your one stock into 2 or 3
What is, and adv and dis or Stock reinvestment plans
Reinvesting dividends to get more stocks
Good because allows to purchase more stock with no transaction costs
but bad because of tax and bookeeping
WHy would a firm do a stock dividend
To reduce the stock price if overvalued, increase liquidity in the market by having more stocks so more accesible to the market
Do stock splits effect any ratios
NO
How do dividend payments effect Liquidity ratios and leverage
Leverage increases because equity goes down, liquidity decreases cos less cash
Explain the 3 dividend policy theories
Miller Modagliani - it does not matter if a firm pays a stock because investors can create synthetic stocks by selling down capital
Tax aversion - People avoid dividends because of tax reasons
Bird in the hand - it is better to have dividends and no capital appreciation than no div AND no capital appreciation
What is the clientele effect
It does not matter if a firm pays or does not pay a stock as investors are attractted to firms that suit their desires
Does starting to pay a div mean the company has good prospects
Yes and no. It could mean that growth has stagnated, or that they have extra cash to burn.
What are the effects of the dividend policy on the firm
Can effect the investments of the firm (which projects they invest in)
Financial flexibility - more cash = more opportunities
Volatility in the market means lower probability of divs
Tax can effect a firm’s decisions
Contractual obligations, covenants needing to be met
What is dividend imputation
Divs are taxed at the higher of the corp or investor level. If the firm pays higher tax, the investor still needs to pay tax, but get a tax refund later
What is the residual dividend model
Dividends = Net Income – (Target Equity Ratio x Total Capital Budget)
So take your net income, work out how much should be equity, and subtract that from the net income
What is a massive disadvantage of the residual div model
Divs can be volatile
what happens at the ex div date?
The share price should drop by the amount of the dividend
What does a share repurchase effect on the financial statements, and how does it effect leverage and EPS?
Asset decrease, Equity Decrease, Increased leverage (because debt is increased relative to equity) and EPS increases because there are less shares
If you use debt to buy shares, which ratio do you need to compare to after tax cost of debt to increase EPS
Earnings yield. It must be higher than the after tax cost of debt to increase EPS
If you buy your shares back, and the cost per share is more than the BVPS, what happens to BVPS after the transaction
Your BVPS will decrease bro
What are 5 reasons for repurchasing shares instead of divs
Tax benefits of cap gains over income
Send a positive message to the market
Increased flexbility, you can buyback whenever you want
To offset options of employees buying shares
Increase leverage
How does a share repurchase effect leverage
Increases it
Name some motives for a merger
Synergy, access new markets, tax, management incentive
What is bootstrap Earnings in Corporate finance?
It is when a firm with High PE aquired a low PE firm to boost its PE
What are the 2 ways to finance an aquisition and why would you use either
Cash, shares. An aquirer wants to use cash always. A target may like shares instead if they beleive in combined entity will take off
Give me some defense mechanisms PRE offer for a takeover
Poison pill (dilute own shares) Poison put (put all debt back on firm) Staggered board (delays takeover) Need for supermajority to accept takeover Golden parachute (huge payout needed for managemet)
Post offer defense mechanisms
Lawyers
Say no
Greenmail - paying the acquirer to not own firm
White knight - ask someone else to aquire you
Explain the hershman heinman index and what the formula is?
It is the probability of the regulator stepping in the determine an antitrust law against a merger
Formula is
(Market share * 100)^2 -of each firm in the market
Then compare that formula to what the result is after the merger, if the result changes by more than 50, there is a antitrust law inbound
Is the sharpe ratio effected by cash
no
What is the differene between the comparable company and comparable transaction approach?
The comparable transaction approach already includes the takeover premium
Fomua for takeover premium
The Aquisition price - pre annnouncment share price / pre announcement share price
How do you do the comparable company method (ratios etc.)
You take comparable comany’s ratios, then compare that to your ratios to determine a price, BUT THEN ADD THE Takeover premium
POst merger EPS, how to calc
So, earnings is just the combination of the 2 entities, the shares will INCREASE by the $ per acquirer divided by aquiree. Share price of acquiree divided by that number is the NEW SHARES CREAteD
Explain the difference between an equity carve out, spin off and split out
Split out - new firm, we take your shares and give you new ones (only some shareholders)
Spin off - just recieve new shares
Equity carve out - Creation of a new entity that gives cash inflow to the parent.
Increased inflation does what to profitability and why
Increased inflation reduces the value of the depreciation tax shelter
What are the 4 reasons for a divesture
Bad fit, poor profitability, can sell for good profit, we need the cash
What is the formula for the value of a firm post acquisition
Value of both firms + Synergy value - cash paid
