Corporate issuance Flashcards

Question

Business model variations?

Answer 1

Variations: Private label or ‘contract’ manufactures - produce goods to be marketed by others licensing arrangements - produce something using someone else’s brand name in return for a royalty value-added resellers - not only sell but add value with layered services or customization franchise models - typical in service intensive business

Answer 2

E-commerce models: affiliate marketing - generate commission revenue for sales generated on other’s websites marketplace businesses - create a network (platform) of buyers and sellers without taking ownership of the goods aggregators - re-market products/services under its own brand

Answer 3

Network effects and Platform business models/ - produce an increase in value to users as more users join one-sided - FB two-sided - Ebay Linear business - value is added by the firm platform business - value is added by users Crowdsourcing business models/ users contribute directly to a product, service, or online content Hybrid business models/ combines linear + platform models

Answer 4

Macro risk ➞ risk from external environment (econ., legal, pol., reg.) higher for cyclical sectors Business risk ➞ how the business is managed/operated affects results - captured by EBIT (pre-financing, pre-tax

Answer 5

competitive risk - heightened due to a lack of competitive advantage - the risk of a loss of market share - higher when both market share and pricing power are low - disruption introduces risk to even strong incumbents product market risk - risk that market size is actually smaller (i.e. market does not really value what you offer) - highest pre-revenue - existing markets may also shrink due to changing consumer preferences, technological obsolescence, et Execution risk: mgmt. may be unable to execute the strategy - the more unproven or distant the strategy or mgmt. team, the higher the risk

Answer 6

Competitive intensity/ rivalry ➞ higher, profitability ➞ lower - lower ROIC, lower margins, lower EBIT Competitive dynamics in the value chain/ power of buyers/suppliers threat of substitute products Long-term growth and demand outlook/ slowdowns introduce excess capacity and possible price competition - risk to profitability Others/ exogeneous shocks (geopolitical, natural disasters, etc.) regulatory/tax Business risk is captured impacts to EBIT or bottom line performance

Answer 7

Operating leverage is FC/TC measures the degree a buiness can increase operating income by increasing revenue. Financial risk refers to capital risk, mainly the level of debt in a company. Can be financing risk - cost gets higher or default risks Financial leverage * operating leverage = total leverage.

Answer 8

IRR assumes reinvestment at IRR - may not be realistic IRR issue/ non-conventional CFs may produce multiple IRRs (as many as there are sign changes)

Answer 9

Function of the business cycle, likely with seasonal/variable components

Answer 10

1/10 net 30 means there is a 1% discount if paid within 10 days otherwise payment is due in 30 days. Numerator gives the discount rate.

Answer 11

Yield to maturity method and Debt rating approach (when reliable bond prices are not available)

Answer 12

Survey method (asking finance experts), Capm, Peer company analysis , Bond yield plus risk premium approach

Answer 13

Find peer company with similair business risk then delever and relever to the company you are valuing

Answer 14

Issue with method 1 is that the present value of the difference doesnt equal the cost of raising capital

Answer 15

under MM Prop. I/II, leverage does not affect the value of a firm or wacc, but does cause the risk of equity to increase and therefore

Answer 16

at the extreme, optimal capital structure = 100% Debt wacc = 𝐫𝐝 (𝟏 − 𝐭) - counterpoint ➞ personal taxes - since interest is taxed higher than dividends or capital gains, investors will begin to demand a higher pre-tax return to debt (as equity availability ➞ Costs of Financial Distress (more likely) - operating/financial leverage magnifies losses - financial distress adds costs ➞ implicit and explicit lost customers bankruptcy costs employees suppliers agency costs of debt - greater probability of default raises costs of debt

Answer 17

Financing capital investments - key financing decisions typically tied to a specific investment or acquisition - nature of the investment may be well or poorly suited to leverage - well suited ➞ marketable, cash-generative, considered strong - asset/liability mgmt. - short-term projects should use short-term financing (ret. earn, s.t. debt) - foreign investments typically financed substantially with debt - hedges currency risk by borrowing in the same currency as revenues earned

Answer 18

financings are often opportunistic - borrow when rates are low, sell equity when share prices are elevated

Answer 19

Signalling - issuing equity seen as a negative signal - mgmt. believes shares are overvalued or they had no other alternative

Answer 20

iii) Management & Directors Issues b) when compensation is tied to the size of the business - can lead to ‘empire building’ ➞ M&A that increases size but not shareholder value c) reliance on stock options can motivate risk-taking behavior (only participate in the upside) iv) Regulators/Government - capital structure may be a regulatory issue - capital structure may be influenced by global tax rates

Answer 21

FC / contribution margin per unit, gives net income equal 0

Answer 22

Operating fixed costs (no interest)/ contribution margin, gives operating income equal 0