Corporate Finance Flashcards
Capital budgeting process
- Generate inv ideas
- Analyze project ideas
- Create firm-wide capital budget
- Monitor discussions and conduct a post-audit
5 principles of capital budgeting
- Decisions are based on cash flows
- Cash flows are based on opportunity costs
- Timing of CF matters
- CF are analyzes on after-tax basis
- Financing costs are reflected in project’s required rate of return
Categories of capital projects
- Replacement costs
- Expansion projects
- New product or market dev
- Mandatory projects for regulation
- Other, like R+D
COGS
Beg inventory + purchases - end inventory
Operating cycle
Days if inventory + days of receivables
Break even quantity of sales
=(fixed op costs + fixed fin costs)
/
(Price- var cost per unit)
EPS after buy back
= (total earnings - after tax cost of funds) / shares outstanding after buy back
Degree of total leverage
= DOL • DFL
= % ch net income / % ch sales
= % ch EPS / % ch sales
Degree of financial leverage
= % ch EPS / % ch EBIT
= %ch net income / % ch operating income
= EBIT / (EBIT - interest)
Degree of operating leverage
= % ch EBIT / % ch sales
cash dividends and share repurchases have what kind of effect on shareholder wealth?
none
value of a levered company
= unlevered value + (debt * tax rate)
CAPM
required rate of return on equity (ke) =
RFR + Beta [ expected return on market - RFR ]
RFR + Beta [market risk premium]
Dividend Discount Model
ke = g + D1/Po
Bond Yield plus Risk Premium Equity Cost Model
ke = bond yield + equity risk premium
Preferred Stock cost of capital
kp = D/P
Debt cost of capital
kd = pre-tax costs
kd ( 1 - t ) = post tax cost
Marginal Cost of Capital
- schedule shows WACC for different amounts of capital
- upward-sloping
flotation costs
adjust flotation costs as an initial cash outflow s.t.
NPV = PV of cash inflows - cost of project - flotation cost
effect of leverage on net income and ROE
greater financial leverage decreases net income
expected ROE increases if ROA > debt cost
variability of ROE increases (increased risk)
money market yield MMY
= HPY x 360 / days
= [(face val - price) / price] * 360/days
bond equivalent yield BEY
= HPY x 365/days
Cost of trade credit
= {[1 + (%disc /[1-%disc])] ^ (365/days past discount)} - 1
profitability index
= PV of future cash flows / initial outlay for project
sustainable growth rate
= (retention rate) * (ROE)
= (1 - payout ratio) * ROE
market risk premium
= expected return on the market - risk free rate
nominal risk free rate
= [(1 + real risk free rate) * (1 + expected inflation rate)] - 1
approx ~ real risk free rate + expected inflation rate
reasons for holding money
- transaction demand
- precautionary demand
- speculative demand
breakpoint for component cost of capital
= amt of capital when component’s cost of capital changes / weight of component in capital structure
