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Corporate finance > Lectures 1,2,3 > Flashcards

Lectures 1,2,3 Flashcards

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1
Q

Present value definition

A

The discounted value of future cash flows

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2
Q

What is the discount factor

A

It is the present value of $1 at a stated future date, given by 1/(1+r)^t

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3
Q

What is net present value

A

A project’s contribution to net wealth. Calculated by present value - investment.

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4
Q

Opportunity cost of capital (hurdle rate)

A

A shareholder’s return that is given up when investing in a project instead of similarly risky financial securities.

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5
Q

2 ways to decide whether a project is worth investing in

A

Positive net present value or if rate of return is above opportunity cost of capital

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6
Q

Discounted cash flow (DCF)

A

The sum of future cash flows multiplied by their discount factors to get present value.

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7
Q

PV of a perpetuity

A

Cash flow/interest rate, (C/r). This assumes that the stream of payments starts 1 period from now.

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8
Q

What is an annuity

A

It is an asset that pays a fixed sum each year for a specified number of years.

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9
Q

What is a perpetuity due

A

A perpetuity that starts immediately, the payments occur at the start of each period. PV is C + C/r or C/r(1+r)

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10
Q

What is the profitability index and when should it be used

A

It should be used to choose between projects to invest in when resources are limited. It is calculated by ( NPV/investment )

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11
Q

What are real assets

A

Tangible assets and intangible assets used to carry on business

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12
Q

What are financial assets

A

They are claims on real assets, for example a bank loan or a corporate bond

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13
Q

What are securities

A

Tradable financial assets

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14
Q

What are investment decisions of buying or building tangible assets sometimes called

A

Capital expenditure (Capex), or capital budgeting

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15
Q

Examples of intangible assets

A

Advertising, R&D and developing computer software

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16
Q

What is the capital structure decision

A

The decision between debt and equity financing

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17
Q

What is meant by equity financing

A

Means issuing more shares or reinvesting cash

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18
Q

What is a corporation

A

It is a legal person, owned by shareholders. As a legal person the corporation can make contracts, carry on a business, borrow or lend money, and sue or be sued. Shareholders have limited liability

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19
Q

What is the main goal of a financial manager

A

To maximise shareholder wealth.

20
Q

Why is profit maximization not a well defined financial objective?

A

See page 9 in book

21
Q

Difference between hard and soft capital rationing

A

Soft rationing is provisional limits set by management to control investment expenditure while hard rationing is where the company finds it difficult to raise financing and projects with significant NPV are passed up.
Soft rationing should never cost the company anything where hard does

22
Q

What are current assets

A

A current asset is any asset which can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle or financial year.

23
Q

Market value added definiton

A

The difference between market value and book value of a firm’s equity.

24
Q

What is economic value added (EVA)

A

Net income after deducting the dollar return required by investors.
EVA = income earned - (cost of capital x investment)

24
Q

What are financial statements

A

Financial statements are accounting reports issued periodically that present past performance information and a snapshot of the firm’s assets and the financing of those assets.

24
Q

What is a balance sheet

A

Balance sheet records a snapshot of the firm’s financial position at the end of fiscal year.

24
Q

What is an income statement

A
24
Q

Accounts payable

A

This is what you owe suppliers

24
Q

What is net working capital

A

current assets - current liabilities

24
Q

What are recievables

A

Sales for which the company has not yet been paid

24
Q

Net book value

A

Acquisition cost – Accumulated Depreciation

24
Q

What is market capitalisation and formula

A

The total market value of equity given by:
no of shares x market price per share

25
Q

What is Market Value Added (MVA)

A

Market cap - equity book value (total shareholder equity)

25
Q

What does treasury stock represent on liabilities of balance sheet

A

They represent share repurchases by the company, it is another form of payout other than dividends.

25
Q

Why does a share repurchase shrink shareholder equity?

A

A share repurchase would reduce the company’s cash holdings and therefore its assets by the amount of cash expended in the buyback.

25
Q

What is enterprise value

A

It measures the value of the underlying business assets.
EV = Market value of equity + debt - cash
Think of this as the cost to acquire a business or the total value of the firm to debt and equity investors combined.

26
Q

Leverage ratio

A

assets/equity

27
Q

Dupont formula for ROA

A

asset turnover x operating profit margin (sales/assets * after tax interest + net income /sales)

28
Q

What are financial statements

A

Accounting reports issued periodically that present past performance information and a snapshot of the firm’s assets and the financing of those assets

29
Q

What is a balance sheet

A

It records a snapshot of the firm’s financial position at the end of the fiscal year

30
Q

What does the income statement show

A

Income statement lists the firm’s revenues and expenses over a fiscal year.

31
Q

Formula for an annuity lasting t-years

A

C( 1/r - 1/r(1+r)^t )

32
Q

How to calculate long term capital

A

long term debt + shareholder equity

33
Q

Long-term debt ratio

A

Long term debt / long term debt + equity

34
Q

Total debt ratio

A

Total liabilities/ total assets

35
Q

Formula for WACC

A

(cost of equity * %equity) + (cost of debt * %debt * (1-Tc))

Corporate finance (5 decks)

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