Midterm Flashcards
PEm
Stock Price / EPS
b in PEf form
Dividend ratio
OCF
EBIT*(1-Tc) + Depr
NCS
End NFA - Beg NFA + Depr
NFA = Gross FA - Acc Depr
chNWC
Current Assets - Current Liab [take diff in two years]
FCF
OCF - NCS - chNWC
TV w/ ra [used for LBO]
CF(n-1)*(1+g) / (ra-g)
TV w/ WACCme
CF(n-1)*(1+g) / (WACCme-g)
PV of Future Tax Shields
TVra - TVwaccme –> discount using rd
Loan payment steps
1) use PV annuity form to calculate payments (equal pmts)
2) each period, interest = balancerd
3) tax shields = interestTc
Valuation, price to offer shareholders
Only use equity value of firm! then divide by # shares
LBO APV
Base Case + PVTS + PVTSterm + cash - ST liab
MM Formula Use
w/o tax = constant D/V ratio
w/ tax = constant level of debt + constant CF + short-term projects
Salvage value
After tax salvage value = MV - [Tc*(MV-BV)]
CAPM rf’s
first rf = spot rate
mkt risk prem = historical rate (same a market returns)
When to use WACC
Proj related to firm’s operations + has same average risk + company plans to use same D/E ratio
Diff between WACC vs APV
WACC = Tax shields through disc rate; assumes constant D/E APV = Calc tax shield directly; allows D/E to change
How LBOs create value?
reduce taxes, manager incentives, misc cost adv
business risk v financial risl
biz risk = ra; fin risk = re-ra
LBO - value of firm prior to LBO
Equity + Debt!
Types of leases
Full-serv vs net lease
Sale + lease back vs direct
True vs non-true
Operating vs financial
Dubious motives to lease
Avoids capital expen limits
Leasing preserves capital
Provides off-balance sheet financing
Makes firm look more profitable
OCF Leases
Sales - 0 - Lease Cost - Depreciation = EBIT OCF = EBIT + Depr - (EBITneg*Tc)
Base case NPV
Perp CF / (r-g)
PVTS
Interest*Tc
Impact of personal taxes
(1-Td) > (1-Tc)(1-Te) – better to use debt
1-Td
When to use T*
If (1-Td) > (1-Tc)(1-Te) – debt will add value
Added value is now TB(L) = Debt * T* = “Effective tax shield of debt”
PV(AB)
PV(A)+PV(B)+Value Created
Gained by Acquirer
PV(AB)-PV(A)-Amount Paid
Gained by Targer
Amount Paid - PV(B)
Bi-modal Options
SHP + B(1+rf) = Value of call (high)
SLP + B(1+rf) = Value of call (low)
X (convertibles)
n = # new shares created Xw = exercise price/share Alpha = n / (n+share oustanding) X = (1-alpha)*n*Xw
P (convertibles)
Y = Current Price * Shares outstanding P = alpha*Y
Stock price effect (convertibles)
E(prior) = Price * shares
New E = E(prior) - option granted value
New E / shares = New stock price
Take diff of stock price before and after
5 Mkt Imperfections (cap struct)
Corp Taxes – Cost of FD – Personal Taxes – Agency Problems – Asymmetric Info
WACC (inc/dec?) with more debt than equity?
Decrease
T(D) / T(E)
T(D) = Personal tax on interest earnings T(E) = Dividends and Cap Gains Tax
Agency Conflicts
1) Risk shifting (more debt = bad)
2) Mngr Risk Averse (more D = bad)
3) FCF Problems (more D = Good /discipline)
Trade-off Theory
VL=VU + TB(L) - DC(L) - value lost excess risks - value lost manger risk + value gained from discipline
Pecking Order Theory
Cash -> Debt -> Equity (most costly to Share Price)
Why Do Dividends Matter? (7)
1) Pot impact on investments
2) Corp vs pers tax rate
3) Dividend vs CG tax rates
4) Clientele effect
5) Dividends act as signal
6) Issuing stock = expensive
7) Agency conflicts
B-S Inputs [C/P]
Value of asset (P) [+/-] X [-/+] Time to exp (T) [+/+] Risk free rate (r) [+/-] Volatility of stock price [+/+]
