Corporate finance Flashcards
- Stock dividends and stock splits
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
o effective tax rate on dividends
corporate tax rate + (1 − corporate tax rate) × (individual tax rate)
- expected increase in div
[(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
- Share Repurchase Methods
increase EPS because decrease number of shares
o tender offers
very quick to complete) buy fix number of shares at fix price (usually at premium)–> positive signal to investors
o Dutch auction
(not as quick) similar to tender offer (but lower price than tender offer)
o direct negotiation
from a major shareholder
- Rationales for share repurchases
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
- dividend coverage ratio
net income / dividends
- FCFE coverage ratio
FCFE / (dividends + share repurchases)
o Dispersed ownership
none of the many shareholders has control over the corporation bring principal agent problem
o Concentrated ownership
controlling shareholders exercise control over the company. The controlling shareholders can be either minority or majority shareholders
o Vertical (also known as pyramid) ownership
a company has a controlling interest in multiple holding companies, and those holding companies own controlling interests in operating companies
o Horizontal ownership
companies with shared business interests that cross-hold the shares of each other.(es. Key customers or suppliers)
three main approaches for identifying a company’s ESG factors
(1) ESG data providers, (2) industry organizations, and (3) proprietary methods.
- Grinold-Kroner model
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
- Factors Affecting Specific Company Risk Premium
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)
CRP (country risk premium)
sovereign yield spread × (σequity / σbond)
- ICAPM: 2 factor models
o a global market index factor,
o a foreign currency–denominated, wealth-weighted market index
