Corporate finance

Question 1

• Stock dividends and stock splits

Answer 1

o noncash dividends paid by issuance of additional stock.
o They increase number of shares and decrease value of each share.
o NO cash outflow, NO affect current ratio, quick ratio or leverage

Question 2

o effective tax rate on dividends

Answer 2

corporate tax rate + (1 − corporate tax rate) × (individual tax rate)

Question 3

• expected increase in div

Answer 3

[(expected earnings×target payout ratio)−previous div]×adjustment factor
o adjustment factor = 1 / number of years over which the adjustment in dividends will take place

Question 4

• Share Repurchase Methods

Answer 4

increase EPS because decrease number of shares

Question 5

o tender offers

Answer 5

very quick to complete) buy fix number of shares at fix price (usually at premium)–> positive signal to investors

Question 6

o Dutch auction

Answer 6

(not as quick) similar to tender offer (but lower price than tender offer)

Question 7

o direct negotiation

Answer 7

from a major shareholder

Question 8

• Rationales for share repurchases

Answer 8

o Potential tax advantages. When capital gains are taxed favorably compared to dividends.
o Share price support/signaling. Management wants to signal better prospects for the firm company thinks the shares are undervalued
o Added flexibility. Reduces the need for “sticky” dividends in the future.
o Offsets dilution from employee stock options.
o Increases financial leverage by reducing equity in the balance sheet

Question 9

• dividend coverage ratio

Answer 9

net income / dividends

Question 10

• FCFE coverage ratio

Answer 10

FCFE / (dividends + share repurchases)

Question 11

o Dispersed ownership

Answer 11

none of the many shareholders has control over the corporation bring principal agent problem

Question 12

o Concentrated ownership

Answer 12

controlling shareholders exercise control over the company. The controlling shareholders can be either minority or majority shareholders

Question 13

o Vertical (also known as pyramid) ownership

Answer 13

a company has a controlling interest in multiple holding companies, and those holding companies own controlling interests in operating companies

Question 14

o Horizontal ownership

Answer 14

companies with shared business interests that cross-hold the shares of each other.(es. Key customers or suppliers)

Question 15

three main approaches for identifying a company’s ESG factors

Answer 15

(1) ESG data providers, (2) industry organizations, and (3) proprietary methods.

Question 16

• Grinold-Kroner model

Answer 16

ERP = [DY + ΔP/E + i + G + ΔS] – rf
o dy= dividend yielf
o I = inflation forecast
o g=real gdp growth rate
o delta s = expected change in shares outstanding

Question 17

• Factors Affecting Specific Company Risk Premium

Answer 17

o Qualitative factors: Industry classification and competitive position within the industry; corporate governance quality; asset nature and type; customer, supplier, and geographical concentration; and management quality.
o Quantitative factors: Operating and financial leverage, and earnings and cash flow volatility
o If assets of the company very liquid –> low SCRP (low risk)
o If assets of the company mostly tangibles (for example R&D) -> high SCRP (high risk)

Question 18

CRP (country risk premium)

Answer 18

sovereign yield spread × (σequity / σbond)

Question 19

• ICAPM: 2 factor models

Answer 19

o a global market index factor,
o a foreign currency–denominated, wealth-weighted market index