Corporate Finance

Question 1

♦CORP♦ Modigliani-Miller

Answer 1

MM I (w/o taxes): VL = VU

MM II (w/o taxes): Ke = Ko + D/E (Ko - Kd)

MM I (w/ taxes): VL = VU + (T * D)

MM II (w/ taxes): Ke = Ko + D/E (Ko - Kd) * (1 - T)

VL = VU + Tax Shield - Cost of Financial Distress

Question 2

♦CORP♦ Price change ex-dvd

Answer 2

D * (1 + Td) / (1 + Tcg)

Question 3

♦CORP♦ Expected increase in dividends

Answer 3

Expected increase = [(exp earnings * payout) - previous dvd] * adjustment factor_{1/#anos até estabilizar}

Question 4

♦CORP♦ Ethical Decision Making

Answer 4

Friedman Doctrine: Only responsibility is to increase profits “within the rules of the game.” Utilitarianism: Produce the highest good for the largest number of people. Kantian ethics: People are more than just an economic input and deserve dignity and respect. Rights theories: Even if an action is legal, it may violate fundamental rights and be unethical. Justice theories: Focus on a just distribution of economic output (e.g., “veil of ignorance”).

Question 5

♦CORP♦ Economic Income and Economic Profit

Answer 5

Economic income = cash flow + Delta Mkt Value (before interest expense - vai na taxa de desconto)

Economic profit = NOPAT − $WACC = EBIT(1 − T) − $WACC

Question 6

♦CORP♦ Carv-out, Spin-off, Split-off

Answer 6

Carve-out: Newco w/ new shareholders

Spin-off: New-co with existing shareholders

Split-off: Allow shareholders to exchange parent for New-co