Financial Management Flashcards
Why is firm leverage irrelevant for shareholders?
Same capital invested in levered and unlevered (percentage wise of whole equity) –> same returns
What are disadvantages of the Payback Period?
There are several disadvantages: it does not discount CF (does not take into account TVM); does not consider the CF after the payback period; it is an arbitrary decision rule.
What are advantages of the Payback Period?
The biggest advantages of the payback period as a decision rule are that it is simple to compute and easy to explain / communicate.
How can you call systematic risk as well?
idiosyncratic risk
Common Stock
- Dividends are unpredictable
- Voting shares
Preferred Stock
- Dividends predetermined
- Mostly no voting power
- Senior to common stock
Priority terms
Senior vs Junior
Control on company of Debt on Company and example
Covenants
- no extraordinary dividends
- want to limit investment decisions
Systematic risk: two factors /Business risk
- cyclicality of revenues
- Operation leverage
Idiosyncratic risk
Specific risk
Specific risk is also called
Idiosyncratic Risk
What kind of repayments have bonds usually?
Bullet Payment
What is a syndicated loan?
Loan from multiple debt holders
Bonds maturity?
Longer term
Notes maturity
Medium term
Commercial paper maturity
short term
Length of short, medium and long term
- Short-term (<1 year)
▪ Medium-term (1-5 years)
▪ Long-term (>5 years)
Which debt is mostly more expensive?
long term debt
Amortizing repayment
Installments throughout time –> Loans
Bullet repayment
Principal payment at once at the end (often bonds)
Interest rate
- Fixed Vs Floating (changes over time, dependent on market conditions, EURIBOR)
- Derivates are one type of interest rate swaps (from floating to fixed)
- Rating/Spread: Interest rate depends on credit worthiness
Credit worthiness/Ratings are dependent on
- Ability to generate cash-flows
- credit worthiness of its assets
- current level of leverage
Dual class
Class A vs Class B Shares
- differences in voting power & dividends
- Class A more power but also more expensive
- Advantage: smaller investors are attracted
Dual Listing
Public companies might have different entities (legally) but shares are about one company with one profits. Managing and financing is together
Shares to employees
- dilution for current shareholders
- locking employees
Dividend in kind
Instead of giving cash you give asset
Companies with intangibles are usually mostly financed with:
Equity
Companies with a lot of tangibles/assets that can serve as collateral are mostly mainly financed with:
Debt
Financial distress costs: direct costs
- Legal expenses
- Court costs
- Advisory fees
Financial distress costs: Indirect Costs
- result from financial distress
- Reputation (spare parts, customer relationship (airlines), Suppliers stop sending raw materials, lose flexibility cause closer observed by creditors) -> less revenue
- Fire Sales
Financial distress costs: Agency Costs
- Risk Shifting
- Debt overhang
- Cashing out
Risk Shifting
Shareholders may take high risk, negative NPV projects in the hope of realizing the upside potential, leaving bondholders to bear the downside risk (overinvestment)
Debt Overhang
Shareholders may be unwilling to finance positive NPV projects when the firm is in financial distress since debt holders have priority over the CFs (underinvestment)
Cashing Out
Shareholders may try to get money out of the firm ahead of higher priority claims (e.g. by paying cash dividends)
