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Integrative Revision > Corporate Finance > Flashcards

Corporate Finance Flashcards

1
Q

Corporate Management Team

A

Board of directors: ultimate decision making authority
CEO: board delegates day to day decision making to CEO
CFO: responsible for investment and financing decisions
…

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2
Q

Agency Problems

A

Difficult to fulfil requirements of all stakeholders at the same time
Example: employees want higher wages while shareholders want higher dividends

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3
Q

Stock Market

A

provides liquidity to shareholders

Liquidity = ability to easily sell an asset for close to the price you can currently buy it for

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4
Q

Public vs Private Company

A

Public: shares traded on public stock exchange
Private: shares may be traded privately

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5
Q

Primary vs Secondary market

A

Primary: corporation issues new shares to its investors (IPO) on primary market
Secondary: shares are then traded between investors on secondary market

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6
Q

Bid-Ask spread

A

E.g.: you can sell share at bid price and buy the share at ask price, the difference is the transactions cost (for the market maker)

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7
Q

Market to book ratio

A

= market value of equity / book value of equity

Low ratio: value stocks –> pay out dividends, but rather low growth
High ratio: growth stocks –> usually don’t pay much dividends, but expected to grow fast

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8
Q

TEV

A

Total enterprise value = market value of equity + debt - cash
–> Cost of taking over the business

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9
Q

EPS

A

Earnings per share = net income / shares outstanding

Shares can grow due to stock options or convertible bonds –> diluted eps

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10
Q

NWC and Free cash flow

A

NWC = current assets - current liabilities –> cash + inventory + receivables - payables

FCF = Unlevered net income (Revenues - cost - depreciation * (1 - tax)) + depreciation - capital expenditure - increase / + decrease of NWC

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11
Q

Financial Statement analysis used to

A

Compare company to itself over time

compare company to other similar companies

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12
Q

Profitability ratios

A

–> profitability related to value of sales

Gross margin = gross profit/sales
Operating margin = operating income / sales
Net profit margin = net income / sales

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13
Q

Liquidity ratio

A

evaluates a company’s financial liquidty

Current ratio = current assets / current liabilities
Quick ratio = (current assets - inventory) / current liabilities
Cash ratio = cash / current liabilities

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14
Q

Working capital ratios

A

Accounts receivable days = accounts receivable / average daily sales
Accounts payable days = accounts payable / average daily cost of sales
Inventory turnover = annual cost of sales / inventory

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15
Q

Interest coverage ratios

A

–> company’s ability to meet interest obligations
EBIT / interest expense
EBITDA / interest expense

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16
Q

Leverage ratios

A

Debt to Equity ratio = total debt / total equity
Net debt = total debt - cash

–> extent to which company relies on debts as source of financing

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17
Q

Investment returns

A

Return on Equity = net income / book value of equity

Return on assets = (net income + interest expense) / book value of assets

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18
Q

Valuation ratios

A

P/E = market capitalisation / net income = share price / EPS

  • -> years need to earn back the invested money
  • -> value stocks: low, growth stocks: high
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19
Q

Valuation principle

A

Value of benefits > value of costs = decision increases market value of company

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20
Q

Time value of money

A

difference in value of money today and money in the future

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21
Q

Net present value

A

NPV = difference between PV of benefits and PV of costs

–> choose the alternative with highest NPV

22
Q

Arbitrage opportunity

A

Arbitrage: taking advantage of a price difference arising from buying and selling equivalent goods in different markets
Arbitrage opportunity: any situation where you can make a profit without taking any risk

23
Q

Rules of time travel

A
  1. Compare and combine values only at the same point in time
  2. moving cashflows forward (compounding) : multiply by (1+r)^n
  3. moving cashflows back (discounting): divide by (1+r)^n
24
Q

Perpetuity vs Annuity

A

Perpetuity: Stream of equal cashflows occurring at regular intervals and lasting forever
Annuity: stream of N equal cashflows occurring at regular intervals lasting for limited period

25
Q

IRR

A

Internal rate of return, defined as interest rate that sets the NPV of cashflow equal to zero
Break even of investment decision
Maximum you can earn with the investment

26
Q

EAR vs APR

A

Effective annual rate: total amount of interest earned at end of period, considers effect of compounding (interest on interest)
Annual percentage rate: simple interest gained

27
Q

Nominal and real interest rate

A

Nominal doesn’t represent increase or decrease in purchasing power
Real: adjusted by inflation/deflation

RR = NM + Deflation
RR = NM - Inflation
28
Q

Yield curve

A

Term structure: relationship between investment term and interest rate
Yield curve: graph of term structure

29
Q

Bonds

A

Zero-coupon bonds: only pay face value at term end, ytm = interest rate
Coupon bonds. pay face value at end and regular coupon payments, ytm = discount rate that equates PV of remaining bond cash flows to its current price

30
Q

Interest rates and bond prices

A

Inverse/negative relationship

31
Q

NPV investment rule

A

Take the alternative with the highest NPV

Equivalent to receiving NPV in cash today

32
Q

IRR Rule

A

Take investment with IRR higher than cost of capital

Reject investment with IRR lower than cost of capital

33
Q

Payback rule

A

Take investment where payback period is less than predefined length of time. Otherwise reject

34
Q

incremental IRR

A

IRR of incremental cash twos resulting from replacing one project with another
Discount rate at which it makes sense to switch from one products to the other

35
Q

Profitability index

A

= NPV / Resource consumed

36
Q

Capital budget

A

Lists investments a company plans to undertake and estimates future earning
Capital budgeting: process of analysing alternative investment and deciding which to accept

37
Q

Incremental earning

A

Amount by which company’s earnings are expected to change due to the investment decision

38
Q

Indirect effects on incremental earnings

A 
Opportunity Cost
Project externalities
Sunk costs (don’t consider in incremental analysis)
39
Q

Break-even analysis

A

Break even level of input is the level that causes NPV of investment to be 0

40
Q

Sensitivity and Scenario analysis

A

Sensitivity: How NPV changes with a change in one assumption
Scenario: simultaneously changing multiple assumptions

41
Q

Stock valuation

A
  • PV of dividend payments determines stock price
  • PV of total payouts determines equity value
  • PV of FCF determines enterprise value
42
Q

Dividend discount model terminology

A
  • Dividend yield = % return investor expects from dividend paid by stock
  • Capital gain = how much investor will earn on the stock
  • Capital gain rate = capital gain a % return
  • Total return = Dividend yield + capital gain rate
43
Q

What can a company do with its earnings?

A
  • Pay out dividends (= dividend payout rate)

- Retain and reinvest (= retention rate)

44
Q

How to increase its dividend

A
  • Increase earnings (net income)
  • Increase dividend payout rate
  • Decrease shares outstanding
45
Q

Total payout model

A

Values all of the company’s equity

PV = PV(Future total dividends + repurchases) / shares outstanding

46
Q

Share repurchase

A

Company buys back own stock
Less money to pay dividends
Decrease shares outstanding
Increase EPS and Dividends per share

47
Q

Discounted FCF Model

A

Determines value of company to all investors

Enterprise value = Market value of equity + debt - cash

48
Q

Source of equity capital

A 
Angel investors
Venture capital
private equity
Institutional investors
Corporate investors
Crowdfunding
49
Q

Common vs Independent risk

A

Common: systematic, undiversifiable, market risk
Independent: firm specific, unsystematic, diversifiable

–> well diversified portfolio has no independent risk

50
Q

CAPM - Capital asset pricing model

A

Investors…

  1. can buy/sell all securities at competitive market prices and borrow/lend at risk-free interest rate
  2. hold only efficient portfolios of traded securities
  3. have homogeneous expectations regarding volatilities, correlations, expected returns

Integrative Revision (11 decks)

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