Corporate Issuers Flashcards
Common Top-Down Approaches to modeling revenue
- Growth relative to GDP Growth
- Market Growth & Market Share
Bottom-Up Approaches to Modeling Revenue
- Time Series
- Returns based measure
- Capacity Based Measure
Statutory Tax Rate
Corporate Tax Rate of the Country in which the company is domiciled
Effective Tax Rate
Reported income tax expense on the income statement divided by pre-tax income
Cash Tax Rate
Cash paid for taxes divided by pre-tax income
Illusion of Control Bias
Tendency to overestimate what can be controlled and ultimately taking fruitless actions in pursuit of control ie. building overly complex models or collecting more information than needed
Conservatism Bias
Prior views or forecasts are maintained despite new evidence or information to the contrary. Also called Anchoring Bias.
Representativeness Bias
Tendency to classify new information based on past experiences or known classifications
Confirmation Bias
Tendency to look for and notice what confirms prior beliefs and to ignore or discount what contradicts prior beliefs.
Porter’s Five Forces
- Threat of Substitute Products
- Intense Rivalry Among Competetive Participants
- Bargaining Power of Suppliers
- Bargaining Power of Customers
- Threat of New Entrants
Liquidating Dividend
- When a company is going out of business and net assets are distributed to shareholders
- Sells a portion of its business for cash and proceeds are distributed
- Pays a dividend that exceeds its accumulated retained earnings (impairs stated capital)
Flotation Costs
Costs incurred in the selling of shares ie. underwriter’s fees, legal costs, registration expenses
Dividend Policy Does Not Matter
Assumes Perfect capital markets, with no taxes are expenses. There is no distintion between share repurchases and dividends paid out
Dividend Policy Matters: The Bird in the Hand Argument
The argument that investors prefer a dollar of dividends over a dollar of potential cap gains because they view reinvested earnings as more risky. “A bird in the Hand is worth more than two in a bush.”
Dividend Policy Matters: The Tax Argument
If capital gains are taxed less than dividends, investors should prefer capital gains
6 Factors that affect Company Dividend Policy
- Investment Opportunities
- The Expected Volatility of Earnings
- Financial Flexibility
- Tax Considerations
- Flotation Costs
- Contractual and Legal Restrictions
Double Taxation System
Pretax earnings are taxed at a corporate level and then taxed again at the sharesholder level
Dividend Imputation Tax System
Corporate Profits distributed as dividends are taxed just once at the shareholder’s tax rate
“Franking Credit” is a tax credit to offset corporate taxes to shareholders
Split-Rate Tax System
Earnings ditributed as dividends are taxed at a lower corporate tax rate, and then taxed at the individual investor’s income tax rate
Stable Dividend Policy
Regular Divedends paid do not reflect short term volatility in earnings
Constant Dividend Payout Ratio
Paying out a constant percentage of net income in dividends
4 Share Repurchase Methods
- Buy in the Open amrket
- Buy a fixed number of shares at a fixed price “fixed price tender offer”
- Dutch Auction
- Repurchase by Direct Negotiation
Dutch Auction
Tender offer to existing shareholders where the company stipulates a range of prices; uncovers the minimum price at which the company can buy back the desired shares
Dividend Coverage Ratio
Net Income / Dividends
Dispersed Ownership
Existance of many shareholders, none which have the ability to indivisually exercise control
Concentrated Ownership
Individual a group with enough shares to exercise control over the Company
Principal-Agent Problem
Dispersed ownership and Dispersed voting power; Strong manager, weak shareholders
Principal-Principal Problem
Concentrated ownership & Concentrated voting power; strong shareholders and weak managers.
Insider
When managers and Board of Directors are also shareholders
Independent Board Directors
Board Directors with no material relationship with company in the form of employment, renumeration or ownership
Shareholder Activism
Strategies used by shareholders to attempt to compel a company to act a certain way
Stranded Assets
Assets that are obsolete or economically unviable, often owing to regulatory changes or government policy
Weighted Average Cost of Capital (WACC)
Cost of Debt
Cost of Equity
Cumulative Preferred Stock
Requires that a company pay in full any issed diveneds before paying other common shareholder dividends.
Finance (or capital) Lease
An example of an amortized loan, where the lesee owns or has the right to own the equipment at the end of the lease.
Capitalized on the financial statement
The two methods of estimating ERP
- Historical Approach (ex post)
- Forward Looking Approach (ex ante)
ERP Formula Using Gordon Growth Model
Grinold-Kroner Model to estimate ERP
Required Rate of Return Formula using DDM
Bond Yield Plus Risk Premium Approach to Estimating Required Rate of Return on Equity
Fama-French Model
Five Factor Fama-French Model
Required Return on Equity for Private Companies often Includes:
- Size Premium (SP)
- Industry Risk Premium (IP)
- Specific Company Risk Premium (SCRP)
Expanded CAPM Model
Private Company
Build-Up Approach
Private Company
Country Spread Model
Emerging Market Company
Country Risk Premium Estimation
Aswath Damodaran (2021)
Global CAPM (GCAPM)
Single global index is the only factor
International CAPM (ICAPM)
Types of Corporate Restructurings
Conglomerate Discount
Entity is trading below the Fair Value of the Sum of its parts
Takeover Premium
