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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
IRR
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
EAR vs APR
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
Nominal and real interest rate
Nominal doesn’t represent increase or decrease in purchasing power Real: adjusted by inflation/deflation ``` RR = NM + Deflation RR = NM - Inflation ```
28
Yield curve
Term structure: relationship between investment term and interest rate Yield curve: graph of term structure
29
Bonds
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
Interest rates and bond prices
Inverse/negative relationship
31
NPV investment rule
Take the alternative with the highest NPV | Equivalent to receiving NPV in cash today
32
IRR Rule
Take investment with IRR higher than cost of capital | Reject investment with IRR lower than cost of capital
33
Payback rule
Take investment where payback period is less than predefined length of time. Otherwise reject
34
incremental IRR
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
Profitability index
= NPV / Resource consumed
36
Capital budget
Lists investments a company plans to undertake and estimates future earning Capital budgeting: process of analysing alternative investment and deciding which to accept
37
Incremental earning
Amount by which company’s earnings are expected to change due to the investment decision
38
Indirect effects on incremental earnings
``` Opportunity Cost Project externalities Sunk costs (don’t consider in incremental analysis) ```
39
Break-even analysis
Break even level of input is the level that causes NPV of investment to be 0
40
Sensitivity and Scenario analysis
Sensitivity: How NPV changes with a change in one assumption Scenario: simultaneously changing multiple assumptions
41
Stock valuation
- PV of dividend payments determines stock price - PV of total payouts determines equity value - PV of FCF determines enterprise value
42
Dividend discount model terminology
- 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
What can a company do with its earnings?
- Pay out dividends (= dividend payout rate) | - Retain and reinvest (= retention rate)
44
How to increase its dividend
- Increase earnings (net income) - Increase dividend payout rate - Decrease shares outstanding
45
Total payout model
Values all of the company’s equity PV = PV(Future total dividends + repurchases) / shares outstanding
46
Share repurchase
Company buys back own stock Less money to pay dividends Decrease shares outstanding Increase EPS and Dividends per share
47
Discounted FCF Model
Determines value of company to all investors | Enterprise value = Market value of equity + debt - cash
48
Source of equity capital
``` Angel investors Venture capital private equity Institutional investors Corporate investors Crowdfunding ```
49
Common vs Independent risk
Common: systematic, undiversifiable, market risk Independent: firm specific, unsystematic, diversifiable --> well diversified portfolio has no independent risk
50
CAPM - Capital asset pricing model
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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