For Final Flashcards
OCF =
EBIT*(1 - Tax) + Depr
NCS =
End NFA - Beg NFA + Depr
Depr =
(Cost - BV at Salvage) * Depr Rate
AT SV =
MV - Tax * (MV - BV)
inflow of cash is () for NCS
negative
rf represents
pure time value of money
market risk premium
diff b/w expected return on market portfolio & risk free rate
____ stocks earn more than predicted
low beta
small company
value
momentum
firm value with WACC =
cash0 + sum of all future FCF discounted at WACC
___ is (corporate) tax deductible, ____ is not
interest; dividends
expected interest exp each year
D * rd
expected TS each year
D * rd * Tc
value of perpetual debt
D*Tc
debt overhang
existing debt and the potential for distress cause shareholders to forego +NPV projects
assuming situation where shareholders would fund project
risk shifting
more debt is bad
shareholders have incentive to take on riskier projects in presence of debt (and thus gamble w/debt holders $$)
manager risk aversion
more debt is bad
manager wants to reduce personal risk in face of large financial risk
FCF problems
more debt is good
debt acts as disciplinary device
Trade off theory
VL = VU + PVTB - PVDC - value lost from excess risk-taking - value lost from manager risk aversion + value gained from disciplining debt
signal from using internal funds
+, has enough CFs to finance business
signal from using debt
+, low risk of future financial distress
signal from issuing equity
-, signals that managers believe the firm is over-valued