Corporate Finance Flashcards
Less developed countries that lack corporate debt markets rely on?
Bank lending or shadow banking system
Transparent and predictable monetary policy of developed economies tend to?
reduce risk premium and interest rate.
Which of the following has high risk premium
a) Common Law
b) Civil Law
Civil law countries offer low protection hence has higher risk premium.
Which companies are safer amongst the two while comparing business risk-
a) cyclical or non cyclical
b) defensive or discretionary
Non cyclical and defensive
Methods to calculate cost of debt are?
a) Matrix pricing- non/thinly traded
b) YTM - if publicly traded - longest bond maturity of straight bond
c) Infer credit rating- if debt is not credit rated - use ratio such as financial leverage or int. coverage.
What is the cost of debt for financial lease?
Rate implicit in the lease (RIIL)
It is the fair value of lease (plus initial cost) to the PV of lease rentals + residual value
If the terms of a finance lease are not disclosed, then the incremental borrowing rate (IBR), the rate on a new secured loan over the same term, may be used.
What is the Ke as per DDM method if not held till maturity?
Ke = Dividend yield + capital gain yield
What is ke as per Fama fench model and extended Fama fench model?
Fama fench model-
Ke = Rf + B (Rm - Rf) + B(SMB) + B(HML)
Extended model -
Ke = Rf + B (Rm - Rf) + B(SMB) + B(HML) + B(SMA) + B(RMW)
SMB = size premium
HML = value stock being riskier than growth
RMW = Profitability
SMA = Momentum/Investment factor
Type of Investment Restructuring?
a) Sale - to another firm
b) Spin off - make it separate but under own control.
Materiality for restructuiring is evaluated on the basis of?
a) Size - >10% of enterprise value, revenue or market cap.
b) Fit
Which comparable analysis is used for measuring spin offs?
Comparable company analysis since it does not include takeover premium directly.
Corporate transactions taken during weaker economic times tend to create ____ value.
Greater
What is the disadvantage of using Comparable Transaction Analysis?
While taking average of transactions it is generally impacted by outliers.
To solve this we take median multiple rather than average.
What is the impact on P/E and EPS after stock split?
P/E will have no impact however, EPS will reduce.
Contributed capital is also remained unchanged but will increase in case of stock dividend.
Dividend does not affect the value of company or Ko is said by which theory of dividend policy?
MM theory which states no transaction cost and taxes.
