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Corp Finance > Equity Valuation & Inv Appraisal & Real Options & Cap 1 & Cap 2 > Flashcards

Equity Valuation & Inv Appraisal & Real Options & Cap 1 & Cap 2 Flashcards

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1
Q

Gordon Growth (constant G)

A

P = D_O(1+G)/(R-G)

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2
Q

What is G equal to

A

G = b(ROI)

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3
Q

Growth vs Income Stocks

A

Growth -> Investors care about future earnings growth not next period dividend
Income -> next period divided

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4
Q

When will PVGO be +

A

When ROI > cost of equity, PVGO will be +

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5
Q

When will you use valuation based on comparable firms?

A

When after a point growth of the company indefinitely = avg stock growth in the economy + p/e ratio is the same

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6
Q

P/E ratios expected indicator of what?

A

E Growth opportunities

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7
Q

P/E ratios increase with what

A

Increase with b, given ROI>R

Increase with ROI

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8
Q

In doing NPV analysis which cash flows do you consider?

A

Incremental cash flows

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9
Q

How do you calculating net cash flows

A

op cf - capex- opp cost - delta WC - taxes on profits

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10
Q

what is opportunity cost

A

cost of foregoing opportunity to use asset elsewhere. assets which are owned by the firm can be sold or let

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11
Q

Are investment costs tax deductible at origin?

A

No they are not, tax authorities use Capital allowances to reduce tax burden

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12
Q

impact on after tax incremental cash flows due to corp tax?

A

Op(1-Tc) + TcxCA

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13
Q

what do you pay taxes on?

A

operating profits

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14
Q

What is the formula for written down value?

A

WDVn = WDVn-1 - CA + Inv Cost - Sales Proceeds

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15
Q

Final CA is known as?

A

Balancing capital allowance

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16
Q

Formula for balancing CA?

A

Bal CA = WDVn-1 - Sales Proceeds

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17
Q

what is final WDV?

A

0

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18
Q

What is R ( OCC)

A

R is the minium required rate of return to take on the project. this R would be the same of investing that amount of money in a well diversified portfolio of financial assets with the same level of systematic risk

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19
Q

what do use to d dividends?

A

CAPM

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20
Q

what do use to use to discount interest payments or principal repayments?

A

CAPM but debt where Rd = Rf

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21
Q

What is firms R

A

r = WACC

22
Q

WACC equals to what?

A

R on assets WACC = RA

23
Q

Pre tax WACC, Post Tax WACC

A

Pre tax WACC = RA, Post Tax WACC < RA

24
Q

When does a firm use own WACC = Ra to discount its project?

A

When firm and project have the same level of systematic risk AND d/e ratio remains constant at the target

25
Q

what does asset beta represent?

A

operating risk of the company

26
Q

what does equity beta represent

A

represents the financial risk of the company w having debt on the ball sheet

27
Q

when do you use method of similars, describe

A

say the ans

28
Q

difference between american call option and european call option

A

american - exercise anytime within the next year, European - exercise in the next year

29
Q

what is pi*

A

pi * is the risk neutral probability of an upjump (1-pi*)..

30
Q

E(total return on project) - options

A

risk free rate of return

31
Q

real options do what to value of firm?

A

increase value

32
Q

growth options increase what BV or MV

A

Growth options increase MV of firms not BV

33
Q

What does MM1 say

A

firm value is independent of capital structure choice, value depends on on net operating income or FCF

34
Q

What does that imply (MM1)

A

investing and financing decsisions are seperate

35
Q

We know that MM1 holds, is WACC of R_L = WACC of R_U

A

Yes, under MM1 WACC between the two remains the SAME.

36
Q

Is the cost of equity going to be higher for a leverd firm under MM1? (hint MM2)

A

Yes, it increases linearly with an increase in D/E (MM2)

R_E = R_A + D/E(R_A-R_D)

37
Q

Under PCM of MM (1958) assumptions what all remain the same

A

WACC and R_D remain the same GIVEN R_D is riskless. R_E increasing linearly with leverage (MM2) under MM (1958) assumptions.

38
Q

How do we model risky debt?

assumption of risky debt?

A

We use real options on firms equity (already risky) and now firms debt
Assumption - zero coupon

39
Q

How do we model firms equity as an option, specify strike price (MM 1953)

A

Equity is a long call option with strike equal to FV of debt and expiry as maturity date of firms debt

40
Q

How do we model firms risky debt?

A

Long a riskless bond + short the value of debt.
K = F
Maturity = maturity of firms debt

41
Q

What is the put call parity under MM1?

A

C + PV(F) = V + P

42
Q

What is EAC, equalised annual cost and how is it calculated?

A

EAC = PV/Annuity factor used to calc present value

43
Q

Under MM2 what assumption do we break?

A

PCM - taxes. Taxes create a tax shield which create a wedge between V_L and V_U

44
Q

What is the PV(TS)

A

PV(TS) = TcxD

45
Q

If debt is perpertual what is the V_L

A

V_L = V_u + PV(TS)

46
Q

What happens to WACC when you have taxes?

A

WACC would decrease as WACC = R_A(1-tc(D_l/V_l))

47
Q

When do we use WACC over APV

A

When D/E ratio at the target remains constant or very close to the target

48
Q

Which companies should have more debt?

A

Higher profitability companies should have more debt. Companies with higher NTDS should have lower debt

49
Q

With personal taxes what is the value of my firm?

A

V_L = V_U + gD

Without V_L = V_u + TcxD

50
Q

What is the relationship between PV(BS) and PV(TS)

A

it is a 1-1 increase

51
Q

what is the static trade off theory

A

there is a trade off for having debt vs having more of it due to COFD. This means cost of capital depends on capital structure

52
Q

What can static trade off theory not explain?

A

why leverage is negatively related to profitability and statistically negative abnormal returns when firms issues equity

Corp Finance (3 decks)

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