For Final Flashcards

1
Q

OCF =

A

EBIT*(1 - Tax) + Depr

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2
Q

NCS =

A

End NFA - Beg NFA + Depr

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3
Q

Depr =

A

(Cost - BV at Salvage) * Depr Rate

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4
Q

AT SV =

A

MV - Tax * (MV - BV)

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5
Q

inflow of cash is () for NCS

A

negative

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6
Q

rf represents

A

pure time value of money

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7
Q

market risk premium

A

diff b/w expected return on market portfolio & risk free rate

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8
Q

____ stocks earn more than predicted

A

low beta
small company
value
momentum

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9
Q

firm value with WACC =

A

cash0 + sum of all future FCF discounted at WACC

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10
Q

___ is (corporate) tax deductible, ____ is not

A

interest; dividends

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11
Q

expected interest exp each year

A

D * rd

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12
Q

expected TS each year

A

D * rd * Tc

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13
Q

value of perpetual debt

A

D*Tc

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14
Q

debt overhang

A

existing debt and the potential for distress cause shareholders to forego +NPV projects

assuming situation where shareholders would fund project

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15
Q

risk shifting

A

more debt is bad

shareholders have incentive to take on riskier projects in presence of debt (and thus gamble w/debt holders $$)

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16
Q

manager risk aversion

A

more debt is bad

manager wants to reduce personal risk in face of large financial risk

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17
Q

FCF problems

A

more debt is good

debt acts as disciplinary device

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18
Q

Trade off theory

A

VL = VU + PVTB - PVDC - value lost from excess risk-taking - value lost from manager risk aversion + value gained from disciplining debt

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19
Q

signal from using internal funds

A

+, has enough CFs to finance business

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20
Q

signal from using debt

A

+, low risk of future financial distress

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21
Q

signal from issuing equity

A

-, signals that managers believe the firm is over-valued

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22
Q

Calculating FCF in AHP case

A

Δexcess cash = FCF - net financial cash outflows

Amount added to excess cash comes from FCF that isn’t paid out in dividends, interest, etc

23
Q

dividend growth model

A

P0 = [ DPS0 * (1+g) ] / (re - g)

24
Q

if x denotes the ratio PVDC/VL, then PVDC =

A

x * [ (VU + PVTB) / (1 + x) ]

25
Q

key assumptions of perfect capital markets & div policy

A

firm always undertakes all +NPV projects
firm finances itself @ fair market rates
excess cash invested in correctly-priced securities

26
Q

firms with more investment opps will pay ____

A

less dividends

27
Q

if corporate tax

A

less dividends; keep cash in the firm and reinvest it on behalf of shareholders, then pay out returns as a dividend

28
Q

if capital gain tax

A

less dividends

29
Q

clientele effect

A

some clients will prefer diff div policies; they might pay diff tax rates on div income and capital gains

30
Q

dividends may act as a signal

A

since it’s a commitment, consistent divs will incr investor’s perception of firm’s strength

31
Q

issuing securities is $$$

A

ex. underwriter fees

32
Q

dividends can be used to reduce ___ ___

A

agency conflicts

33
Q

reasons for share repurchase

A

tax adv if capital gains tax

34
Q

B-S assumptions

A
can buy/sell stock @all times
no transaction costs
unlimited borrowing/lending @ rf
constant risk-free rate and volatility
stock price is log-normally distributed
stocks DON'T pay divs until after exp date
35
Q

option value relationship w/ sigma

A

option value will INCR with INCR in sigma

unlimited upside potential, limited downside risk ( since we won’t exercise option if price is very low)

36
Q

B-S limitation: Dividends

A

assumes no dividends until after T

if there ARE dividends, they’re paid to actual shareholders and not option holders; you have to adjust by subtracting from price

37
Q

B-S limitation: Horizons

A

overprices LT options bc B-S assumes variance grows proportionally with time horizon

True variance is not going to be as large over long time periods –> a too high variance = too high options price

38
Q

call option & P

A

+ relationship, more likely to be in the money w/ higher current price

39
Q

call option & X

A
  • relationship, more likely to be in the money w/ lower strike price
40
Q

call option & rf

A

+ relationship, increase in rf reduces PV of X

41
Q

PV of X =

A

X / (1 + rf)^T

42
Q

call option & sigma

A

+ relationship, unlimited upside, limited downside

43
Q

call option & T

A

+ relationship
volatility scales up w/ time horizon
PV of exercise price decreases

44
Q

put option & P

A
  • relationship; more likely to be in the money w/ lower underlying price
45
Q

put option & X

A

+ relationship; more likely to be in the money w/ higher strike price

46
Q

put option & rf

A
  • relationship; higher rf reduces PV of X that we’ll receive when we sell the underlying asset
47
Q

put option & sigma

A

+ relationship; gain from downside, protected from upside

48
Q

put option & T

A

+ and -
+ from rising volatility w/ T
- bc increase in T decreases PV of X

49
Q

put-call parity

A

Call0 + PV(X) = Put0 + P0

where PV(X) = X / (1+rf)^T

50
Q

valuing warrant bond component

A

bond value = C*(annuity etc) + F/(1+r)^T

51
Q

warrants: P

A

a * Y

a = n / (n+m)
n = #new shares to which ALL convertible bonds will be converted (s*k)
52
Q

warrants: X

A

k*F

53
Q

Y for warrants

A

firm value - debt
OR
current MV of equity + cash proceeds from convertible bond issuance

54
Q

callable convertible bond

A

less exp bc more restrictions

can lessen financial distress by reducing leverage