Corporate Finance Flashcards
What are the two ways of comparing mutually exclusive projects in a replacement chain?
1) Least common multiple of lives
2) Equivalent annual annuity
What is the formula for economic income?
Economic income = (EBIT(1-T) + D) - Change in market value
What is the formula for economic profit?
Economic profit = EBIT(1-T) - $WACC
$: End of previous year
What is the equivalent of Market Value Added (MVA?)
NPV
What is the formula for residual income?
Residual income = NI - reBt-1
What is the MM Proposition I (with taxes)?
VL = VU + tD
What is the MM Proposition II (with taxes)?
Re = Ro + (Ro - Rd) (1-T) (D/E)
What is the formula for capital available for project investment?
(1 + (%D/%E)) x (NI - Div)
What is the formula for Expected DPS?
Previous DPS + (Increase in EPS x Target payout x Adjustment Factor)
What is the goal of the capital structure decision?
Determine the financial leverage that maximizes the value of the company (or minimizes the WACC)
What is the pecking order?
1) Internal financing
2) New debt
3) New equity
What are the different dividend policies?
1) Stable divided
2) Constant payout ratio
3) Residual dividend policy
What is the Friedmand doctrine?
Company’s purpose is to increase profit for shareholders
What is the Utilitarian doctrine?
Consequences determine if action is moral or not
Most good for most people
What does Kantian ethics promote?
Should not use people to get what you want
What does the Rights theory promote?
Companies should not violate rights of any stakeholders
What does the Justice theory promote?
Rawls: redistribution is justified
What are the objectives of corporate governance?
1) Eliminate or mitigate conflicts of interest
2) Ensure that assets are used efficiently and productively in the best interests of investors and other stakeholders
What are the core attributes of an effective corporate governance system?
1) Delineation of rights of shareholders and other core stakeholders
2) Clearly defined manager and director governance responsibilites
3) Identifiable and measurable accountabilities for the performance of responsibilities
4) Fairness and equitable treatment in all dealings
5) Complate transparency and accuracy in disclosures regarding operations, performance, risk and financial position
How can we interpret the HH Index?
HHI Concentration Level
Post-Merger HHI Concentration Change in HHI Government Action
Less than 1,000 Not concentrated Any amount No action
Between 1,000 and 1,800 Moderately concentrated 100 or more Possible challenge
More than 1,800 Highly concentrated 50 or more Challenge
What are the pre-offer defense mechanisms?
1) Poison pills
2) Poison puts
3) Incorporation in a state with restrictive takeover laws
4) Staggered board of directors
5) Restrictive voting rights
6) Supermajority voting provisions
7) Fair price amendments
8) Golden parachutes
What are the different types of poison pills?
1) Flip-in: gives current shareholders right to purchase additional shares at a discount price BEFORE potential takeover
2) Flip-over: gives current shareholders right to purchase additional shares at a discount price AFTER potential takeover
What is a dead-hand provision?
A poison pill provision that allows for the redemption or cancellation of a poison pill provision only by a vote of continuing directors (generally directors who were on the target company’s board prior to the takeover attempt).
What is a poison put?
Allows bondholders to put the bonds to the company ; large cash outflow needed
