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Cfa GM > CorpFin bb > Flashcards

CorpFin bb Flashcards

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CFA flashcards
1
Q

Does an expansion project effect current cashflows?

A

No

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2
Q

What is the formula for an intial outlay into a new project?

A

Fixed investment + Working Capital - Tax (Salvage - BV)

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3
Q

What is the formula for operating cashflows for a new project

A

(Sales - Depreciation - Expenses)(1-t) + Depreciation

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4
Q

What is the formula for terminal value of a project

A

Salvage value+ Working capital - (Tax(Salvage-BV)

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5
Q

Which two formulas in the new project cashflow analysis are pretty much the same

A

Outlay and terminal value. Just substitute fixed investment for salvage value

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6
Q

Miller Malinga propositions . 2 versions

A

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

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7
Q

Name and describe 4 share repurcahse mediums

A

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)

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8
Q

Explain peking order theory

A

You want to fund projects from internal cash first, t hen debt then equity

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9
Q

What is the static trade of theory?

A

You want to fund with debt UP UNTIL a point where the optimal capital structure is reached, therefore increasing the firm’s value

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10
Q

Is a high or low WACC better

A

LOW bb

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11
Q

Why would a firm have different optimal and target capital structures?

A

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

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12
Q

Why does actual capital structure deviate from target or optimal capital structure

A

Martket movements and the firm exploiting certain opportunities int eh market

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13
Q

Which firms are generally more levered, US or Japan

A

Japan

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14
Q

Do Japense prefer long or short term debt

A

Short

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15
Q

Explain types of shares

A

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

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16
Q

What is, and adv and dis or Stock reinvestment plans

A

Reinvesting dividends to get more stocks

Good because allows to purchase more stock with no transaction costs
but bad because of tax and bookeeping

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17
Q

WHy would a firm do a stock dividend

A

To reduce the stock price if overvalued, increase liquidity in the market by having more stocks so more accesible to the market

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18
Q

Do stock splits effect any ratios

A

NO

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19
Q

How do dividend payments effect Liquidity ratios and leverage

A

Leverage increases because equity goes down, liquidity decreases cos less cash

20
Q

Explain the 3 dividend policy theories

A

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

21
Q

What is the clientele effect

A

It does not matter if a firm pays or does not pay a stock as investors are attractted to firms that suit their desires

22
Q

Does starting to pay a div mean the company has good prospects

A

Yes and no. It could mean that growth has stagnated, or that they have extra cash to burn.

23
Q

What are the effects of the dividend policy on the firm

A

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

24
Q

What is dividend imputation

A

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

25
Q

What is the residual dividend model

A

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

26
Q

What is a massive disadvantage of the residual div model

A

Divs can be volatile

27
Q

what happens at the ex div date?

A

The share price should drop by the amount of the dividend

28
Q

What does a share repurchase effect on the financial statements, and how does it effect leverage and EPS?

A

Asset decrease, Equity Decrease, Increased leverage (because debt is increased relative to equity) and EPS increases because there are less shares

29
Q

If you use debt to buy shares, which ratio do you need to compare to after tax cost of debt to increase EPS

A

Earnings yield. It must be higher than the after tax cost of debt to increase EPS

30
Q

If you buy your shares back, and the cost per share is more than the BVPS, what happens to BVPS after the transaction

A

Your BVPS will decrease bro

31
Q

What are 5 reasons for repurchasing shares instead of divs

A

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

32
Q

How does a share repurchase effect leverage

A

Increases it

33
Q

Name some motives for a merger

A

Synergy, access new markets, tax, management incentive

34
Q

What is bootstrap Earnings in Corporate finance?

A

It is when a firm with High PE aquired a low PE firm to boost its PE

35
Q

What are the 2 ways to finance an aquisition and why would you use either

A

Cash, shares. An aquirer wants to use cash always. A target may like shares instead if they beleive in combined entity will take off

36
Q

Give me some defense mechanisms PRE offer for a takeover

A 
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)
37
Q

Post offer defense mechanisms

A

Lawyers
Say no
Greenmail - paying the acquirer to not own firm
White knight - ask someone else to aquire you

38
Q

Explain the hershman heinman index and what the formula is?

A

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

39
Q

Is the sharpe ratio effected by cash

A

no

40
Q

What is the differene between the comparable company and comparable transaction approach?

A

The comparable transaction approach already includes the takeover premium

41
Q

Fomua for takeover premium

A

The Aquisition price - pre annnouncment share price / pre announcement share price

42
Q

How do you do the comparable company method (ratios etc.)

A

You take comparable comany’s ratios, then compare that to your ratios to determine a price, BUT THEN ADD THE Takeover premium

43
Q

POst merger EPS, how to calc

A

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

44
Q

Explain the difference between an equity carve out, spin off and split out

A

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.

45
Q

Increased inflation does what to profitability and why

A

Increased inflation reduces the value of the depreciation tax shelter

46
Q

What are the 4 reasons for a divesture

A

Bad fit, poor profitability, can sell for good profit, we need the cash

47
Q

What is the formula for the value of a firm post acquisition

A

Value of both firms + Synergy value - cash paid

Cfa GM (11 decks)

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