Corporate Issuers Flashcards
What is the Modigliani-Miller Propositions I assumes for the following?
Capital structure impact on maket value of a company
Investor on future cashflow
Capital market
lend and borrow
agency costs
Finanancing and investing decisions
Market value of a company is unaffected by the capital structure of the company. It is set solely by its cash flows.
Investors have similar expectations regarding future cash flows
Bonds and stocks are traded in a perfect capital market
Investors can lend and borrow at a risk free rate
There are no agency costs
Financing and investing decisions are independent of each other.
Value of firm levered = Value unlevered = EBIT / WACC
where
WACC = (Debt / Value of company) * before tax cost of debt * (1 - tax) + (Equity / Value of company) * cost of equity
where
Value of Company = Equity + Debt
What is the Modigliani-Miller Propositions II assumes for the following?
Capital structure impact on maket value of a company
Tax impact
Cost of equity is a linear function of the company’s debt / equity ratio.
Cost of equity increases as a company increases its use of debt financing to maintain a constant WACC.
WACC ignore tax imapct
What is the WACC formula to calculate the cost of equity for a company using Modigliani-Miller Propositions II.
Weighted average cost of equity
WACC = (Debt / Value of company) * (1 - tax) * cost of debt + (Equity / Value of company) * cost of equity
Value of company = Debt + Equity
What is the WACC formula to calculate the cost of equity for a company using Modigliani-Miller Propositions with tax?
Weighted average cost of equity
WACC = (Debt / Value of company) * before tax cost of debt * (1 - tax) + (Equity / Value of company) * cost of equity
Value of company = Debt + Equity
Calculate next dividend using stable dividend policy.
Expected dividend t +1 = Dividend t0 + (Expected net income * target payout ratio - Dividend t0) * 1 / number of years
Calculate Return on invested capital
ROIC = [Net operating profit - tax] / ( operating assets - operating liabilities.)
Better measure than ROE, as it does not affect by financial leverage.
Calculate Return on capital employed.
ROCE = Operating profit /(Debt + Equity)
does not adjust for taxation (unlike the ROIE) and it does not need adjusting for different levels of leverage (unlike the ROE).
Calculate Return on Equity
ROE = Net income / Equity
What are the roles for
The Global Reporting Initiative (GRI)
The International Integrated Reporting Council (IIRC)
The Sustainable Accounting Standards Board (SASB)
The Sustainable Accounting Standards Board (SASB) produces materiality maps for different sectors to help promote uniform accounting standards for ESG reporting.
The IIRC aim to promote standardized ESG corporate disclosures by companies.
The GRI works towards the development of sustainability reporting standards.
