Corporate Finance Theory Flashcards
Explain the concept of present value and how it relates to company valuation
What is equity value and how is it calculate
How do you calculate the number of fully diluted shares outstanding?
What is a convertible preference share and how is it handled when calculating share count?
What is a convertible bond and how is it handled when calculating share count?
Same as convertible preference shares, except debt instruments - i.e., if in the money we assume they are in fact converted.
What is enterprise value and how do you calculate it?
What is the difference between enterprise value and equity value?
EV represents the value of the firm to all providers of capital: shareholders, debt providers, preferred stock holders. Independent of capital structure
Equity value is just the value of the firm to its common stock shareholders.
Could a company have a negative net debt balance and an enterprise value lower than its equity value?
If a company raises $250 million in additional debt, how would its enterprise value change?
EV is capital structure neutral, so there should be no impact.
The increase in debt is offset by the increase in cash, which gets netted out of EV.
How are convertible bonds and preferred equity with a convertible feature accounted for when calculating enterprise value?
If ITM, then their dilutive effect is added to the calculation of equity as described above.
If not ITM, they would be treated as a financial liability, similar to debt.
Define Free Cash Flows
Define Free Cash Flow Yield
What is capital structure?
Capital structure is how a company funds its operations and growth from a mixture of debt and equity.
The optimal D/E mix is one that minimises the WACC and maximises firm value.
What are the advantages and disadvantages of debt and equity?
Why are periodic acquisitions excluded from the calculation of FCF?
FCF should only include the inflows and ouflows of cash from the core, recurring operations
This includes CAPEX. Capex is recurring and a normal part of business operations
Explain the importance of excluding non-operating income for valuations? (DCF and comps)
What are some of the consequences of a share buy-back?
What is the impact on the share price from a share buyback?
What is the impact on the financial statements from a share buyback?
Why might a company prefer share buy backs instead of issue dividend?
A company with earnings of $100 million and P/E multiple of 15x is considering $200 million in debt to pay a one-time cash dividend. How would you decide if this is a good idea?
