corporate finance

Question 1

FCF

Answer 1

Net Income
\+Net interest after tax
=Unlevered net Income
\+/- Change in deferred taxes
=Net Operating Profit less adjusted taxes (NOPLAT)
\+ Net noncash charges
- Change in net working capital
- Capital Expenditures (capex)
= FCF

Question 2

FCFF

Answer 2

NI + non cash charges + [Interest expense (1-tax rate)] - Fixed Capital Investment (capex) - Working capital investment

Question 3

Terminal value - discount rate

Answer 3

FCF(1+g)
/
adjusted wacc - g

Question 4

Terminal Value - price

Answer 4

FCFt x (P/FCF)

Question 5

change in Price ex-dividend

Answer 5

Change in P = D(1-Td)/(1-Tcg)

Question 6

Defenses to take over:
Just say No

Litigation

Answer 6

say no

file law suit, on anti trust grounds or some violation of security laws

Question 7

Greenmail

Share repurchase

Answer 7

Greenmail:
Pay off potential acquirer by buying back their shares at a premium

Share Repurchase:
Submit tender offer for own shares

Question 8

Leveraged recap

Crown Jewle

Answer 8

Lev recap: take on debt to buy back on shares

Crown Jewel: Sell off a sub or major asset to neutral 3rd party in hopes of dissuading take over. May be illegal

Question 9

PAC man

White Knight

White Squire

Answer 9

PAC: unlikely - make a counter offer to acquire the acquirer

Knight: sell to a friendly 3rd party which good strategic fit

Squire: Have friendly 3rd party buy minority stake large enough to fend of hostile takeover.

Question 10

HHI Concentration Level

Answer 10

Less than 1000- not concentrated - Any change - No action

1000-1800 - moderate concentration - 100 or more change - Possible action

Greater than 1800 - highly concentrated - 50 or more - Anti trust challenged

Question 11

HHI concentration calculation

Answer 11

(MS x 100)^2 x #of firms with that market share.

Example 10 firms 8% & 2 firms 10%

(.08 x 100)^2 x 10 + (.10 x 100)^2 x 2 = 840

Question 12

`DCF advantages and Disadvantages

Answer 12

Good: uses forecasted fundamentals, easy to model and customize

Bad: Difficult when FCF is negative, estimates of earnings and FCF are highly subject to error, sensitive to discount rate, estimation error in terminal value

Question 13

Comparable company

advantages and Disadvantages

Answer 13

Good: data is easy to access, estimates are derived directly from the market rather than assumptions

Bad: assumptions other valuations were correct, provide fair value price not fair value takeover price - must add takeover premium, difficult to incorporate synergies or changing capital structures, uses historical data

Question 14

Comparable Transactions

advantages and Disadvantages

Answer 14

Good: no need to estimate a takeover premium, uses market data rather than assumptions, reduces changes for mispricing

Bad: assumes past transactions were priced correctly, maybe not enough comparable data/transactions, difficult to incorporate synergies or change in capital structures

Question 15

Post Merger Value

Answer 15

= Va + Vt + S - C

Value Acquirer
Value Target
Synergies
Cash

Question 16

Gain accrued to target

Answer 16

Gains = TP = Pt - Vt

Take-over Premium
Price paid for target
Value for target

Question 17

Gain accrued to the Acquirer

Answer 17

Gains = S - TP = S - (Pt - Vt)

Synergies

Question 18

Divestitures

Answer 18

company selling off a division or sub. Most involve direct sale of a portion of a firm to out outside buyer for cash and gives up control.

Question 19

Equity Carve-Out

Answer 19

Create a new independent company by giving an equity interest in a sub to outside share holders. Shares of the sub are issues in a public offering and sub becomes a new legal entity who is seperate

Question 20

Spin-offs

Answer 20

are like carve-outs in that they create a new independent company. The primary difference is that shares are not issues to the public but are instead distributed proportionately to the parents company’s share holders. Parent company doesn’t receive cash

Question 21

Split-Offs

Answer 21

allows shareholders to receive new shares of a division of the parent company in exchange for a portion of their shares in the parent company.

Question 22

Liquidation

Answer 22

Break up the firm and sell its assets piece by piece. Usually associated with bankruptcy.

Question 23

Bear Hug

Answer 23

When the merger target is opposed the acquiring company may submit the merger proposal directly to the board

Question 24

Proxy fight

Answer 24

Proxy solicitation is used to convince shareholders to elect a new board of directors favorable to accepting the merger or offer