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Corporate Finance Flashcards

1
Q

Coupon Payment

A

CPN = (Coupon Rate x Face Value) / (Number of payments per year)

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2
Q

Bond Value

A
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3
Q

Consol Bonds

A

Bonds which live forever, PV = C/Y

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4
Q

When coupon rate = y

A

price = par value

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5
Q

When coupon rate > y

A

price > par value (premium bond)

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6
Q

When coupon rate < y

A

price < par value (discount bond)

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7
Q

The bond trades at par

A

When the y = coupon

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8
Q

Spot Rates

A

Future spot rates are unknown today

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9
Q

Forward Rates

A

Rates which start in the future, but are known now

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10
Q

Downward Sloping Yield Curve

A
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11
Q

Upward Sloping Yield Curve

A
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12
Q

Dividend Discount Model (DDM)

A

Value of the share is the expected PV of future dividends

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13
Q

DDM - Gordon Model

A
P=Price, D=Dividend, R=Discount Rate, g=growth rate
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14
Q

DDM - g

A

g = Retention ratio [ie 1 – Payout ratio] × Return on Equity [ROE]

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15
Q

.

A
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16
Q

NVPGO - Valuation Model

A

P = (EPS/R) + NPVGO

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17
Q

Reverse engineer the NPVGO component

A

NVPGO = P - (EPS/R)

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18
Q

NVPGO - NPV Component

A

NPV = - REPS + (REPS * ROE) / R

REPS=Retained EPS, ROE=Return on Equity, R=Discount Rate

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19
Q

NVPGO - NPVGO Component

A

NPVGO = NPV / (R - g)

NPV=NPV Based on Retained Earnings, R=Discount Rate, g=Growth Rate

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20
Q

DCF - EV

A

EV = Market Value of Equity + Debt - Cash

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21
Q

DCF - Free Cash Flow Calculation

A

Free Cash Flow = EBIT x (1-t) + Depreciation - CAPEX - Increase in NWC

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22
Q

DCF - Discounting Model

A
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23
Q

DCF - Terminal Value

A
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24
Q

DCF - Calculating Share Price

A

Share Price = (EV + Cash - Liabilities)/# Shares

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25
Multiples
- Many Multiples to choose from - use one with a consistent numerator (eg EPS) - No clear guidance how to adjust for differences in growth rates, risk, or differences in accounting policies - Only useful for comparable, relative valuation - Will not help determine if an entire industry is overvalued
26
Efficient Market - Strong Form
- Prices reflect all public and private information - No investor can earn excess returns. - No empirical Support
27
Efficient Market - Semi-Strong Form
- Prices reflect all public information - Fundamental analysis can not earn excess returns. - Some empirical Support
28
Efficient Market - Weak Form
- Prices reflect all information in market prices? - Technical analysis can not earn excess returns - Good empirical support
29
The Expected Return of a Portfolio
- Weighted average of the expected returns of the investments within it
30
Covariance vs Correlation
- Cov is unbound - Corr is between -1 and 1 - In both cases if positive subjects move together, if negative they move inversely
31
Calculate Correlation
32
Calculate Covariance from Correlation
33
Variance of a Porfolio
34
What is an efficient portfolio?
35
What is beta?
Measure of systematic risk. The sensitivity of a stock’s return to the market’s return
36
beta of 1
Asset has **the same systematic risk** as the overall market
37
beta < 1
asset has **less systematic risk** than the overall market
38
beta > 1
asset has **more systematic risk** than the overall market
39
The Effect of Correlation
- no effect on the expected return of a portfolio - Impacts the volatility of a porfolio - The lower the correlation, the lower the volatility
40
Risk
Unsystematic risk - is the risk that can be eliminated by combining assets into a portfolio - also known as unique, asset-specific or idiosyncratic risk Systematic risk - is the risk that can not be eliminated by combining assets into a portfolio - Also known as market risk
41
Relationship between risk premium and beta
42
What is the 'efficient frontier'
43
What is the 'Tangent or Efficient Porfolio'
44
The Capital Market Line
45
The Security Market Line
46
Relationship between the SML and the CML
47
SML - Beta of a Portfolio
The weighted average beta of the securities in the portfolio
48
Summary of the Capital Asset Pricing Model
- The market portfolio is the efficient portfolio. - The risk premium for any security is proportional to its beta with the market.
49
WACC Formula
50
Security Market Line - Cost of Equity
51
SML - Pros & Cons
Advantages - Explicitly adjusts for systematic risk - Applicable to all companies, if we can estimate beta Disadvantages - Have to estimate the expected market risk premium, which does vary over time - Have to estimate beta, which also varies over time - We are using the past to predict the future, which is not always reliable
52
Cost of Debt: YTM Approach
53
Cost of Debt: Lookup Approach
Use a lookup table for the expected return
54
Cost of Debt: SML Approach
55
What is the WACC fallacy?
- When companies use their aggregate WACC to evaluate individual projects
56
Relationship between levered and unlevered beta
57
How does rwacc compare with rU?
58
Modiglliani & Miller
Proposition I – The value of the firm is NOT affected by changes in the capital structure Proposition II – The WACC of the firm is NOT affected by capital structure NOTE: This is only true in a world without taxes and financial distress
59
M&M With Taxes
60
Cost of Financial Distress
Expected Distress Costs = (Probability of Distress) * (Distress Costs)
61
M&M - The 3 Worlds
- Case 1: No taxes, No bankruptcy; No optimal capital structure - Case 2: Tax, No bankruptcy; Optimal capital structure 100% debt - Case 3: Tax & bankruptcy costs; Optimal capital structure part debt part equity
62
Pecking Order theory of Financing
- Start with internal financing (retained earnings) followed by debt, followed by equity
63
YTM for a zero-coupon bond
64
Present Value of a Perpetuity
PV = CF / R | As per C/y for a bond
65
CAGR Formula
66
NPVGO - Where does g come from?
67
How to calculate Variance (& std dev)
The sum of the square of the deviation from the mean of a set of samples, divided by the number of samples | SD is the square root of this

Block 2 (3 decks)

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