Final Exam Flashcards
FCFE is the…
Preferred valuation method by analysts
FCFE reflects…
cash flow generated in a period available for distribution to common shareholders
FCFE is a measure of… but…
dividend-paying capacity but can be used to value non-dividend paying stocks
FCFE is discounted by…
required return on equity
Uses of FCFE
+ Increases in balance of cash and cash equivalents
+ payments to providers of equity capital (calculated as + cash dividends + share repurchases in excess of share issuance)
In a case where target and actual capital structure are given, which do you use to calculate WACC…
target capital structure
Environmental Areas for Discussion (3)
- Climate Change
- Pollution and Resources
- Waste
Social Areas for Discussion (4)
- Labour standards
- community involvement
- diversity
- Customer Safety
Governance Areas for Discussion (3)
- Anti-corruption
- Corporate Governance
- Risk Management
3 ESG Risks
- Physical
- Liability - insurance claim risks
- Transition - policy changes
EAR
Interest rate that is adjusted for compounding over given period - reported as ____% per ____
APR
Quoted interest rate - reported typically as ____% p.a with ___ compounding
Option to Abandon Process (6)
- Draw Decision Tree
- Calculate NPV if forced to operate under any circumstances
- Calculate NPV in good scenario - ongoing = perpetuity
- Calculate NPV in bad scenario - annuity in term requirement
- NPV opening = (prob x good) + (prob x bad)
- Value of option to abandon = NPV opening - NPV forced to operate
Black Scholes Process - Option to Delay (6)
- Calculate Value of Opportunity today
- Calculate NPV today
- Calculate PV of opportunity if delayed = value - PV (cash flow forgone) = S^x
- calculate PV of start up cost = cost/(1+r)
- calculate d1 and d2 –> N(d1) and N(d2)
- calculate C
M&A Pre-Offer Takeover Defence (3)
Poison Pills - flip in, flip out, dead-hand
Staggered Board of Directors
Golden Parachutes
Poison Pill
Legal device that makes it costly for an acquirer to take control of a target without prior approval of the target company’s board of directors
Flip-In Pill
common shareholder of target company has right to buy its shares at a discount, acquirer usually prohibited from participating
Flip-Over Pill
allows shareholders of the target company to purchase shares in the acquiring company at a discount, diluting the shares of the acquiring company’s existing shareholders
Dead Hand Provision
Allows the board of the target to redeem or cancel poison pill only by a vote of continuing directors, more difficult to take over a target without prior approval
Staggered Board of Directors
only a portion of seats are due for election each year - long process for someone to take over via proxy fight
Golden Parachutes
Employment contracts allow executives to receive lucrative payouts (usually several years worth of salary) if they leave target company following change in corporate control
Post-Offer Takeover Defence Mechanisms (6)
Greenmailing
White Knight
White Squire
Crown Jewels
PacMan
Leveraged Buyout
Greenmailing
Termination of hostile takeover through payoff to acquirer - target company can repurchase its own shares from the acquiring company, usually at a premium to the market price, acquirer agrees not to pursue another hostile takeover attempt of the target company for a set period
Leveraged Buyout
Target company buys all of its shares and converts to a privately held company
M&A Payment Methods
Cash
Securities
Mixed
M&A Considerations in Calculations (4)
Cost of Takeover = total value of shares issued/cash paid
Premium = Cost of Takeover - Value of Company
Post Merger Value = Pre-merger value of target + Pre-merger value of acquirer + synergy - cash paid
What is resiudual income?
Remaining income after considering the costs of all of a company’s capital
Columns required to calculate residual income…
EPS or NI
DPS
BV opening or closing
ROE
Required Return on Equity
Equity Charge
RI
Equity Charge =
Required Return on Equity x Opening BV
RI =
NI or EPS - Equity Charge
Scope 1 Emissions
Direct Emission of Green House Gases through its operations
Scope 2 Emissions
Indirect Emissions through purchase of electricity for heating and cooling, etc.
Scope 3 Emissions
Indirect - All the emissions that the organisation is indirectly responsible for, up and down its value chain. For example, from buying products from its suppliers, and from its products when customers use them.
White Knight
Target company seeks a third party buyer to purchase company in lieu of hostile bidder
White Squire
Target company seeks a third party buyer to purchase a portion of the company - not enough to takeover but enough to deter the hostile bidder
Crown Jewel Defence
The target company sells off a portion of the company - if part of the acquirer’s motivations for the takeover, takeover may be abandoned
PacMan
Target company defends itself by making a counter offer to acquire hostile bidder
Trailing P/E
Starting Price for This/Previous Years Earnings
Real Options - Valuing Growth Potential (5)
- Draw Decision Tree
- Calculate PV annuity - original scenario
- Calculate PV annuity - growth scenario and not growth scenarios (CF 1st Year + PVA, t = original period - 1)
- Calculate risk-neutral probability
- Calculate the value of investment using risk-neutral probabilities
Real Options - Option to Expand (5)
- Calculate CF of investing today = CF x probability
- Calculate NPV no growth
- Calculate NPV growth
- (NPV growth x prob)/(1+r) = PV growth
- NPV without growth + PV growth = NPV of undertaking investment
