mistakes from practice tests Flashcards
how do you calculate the EPS for the acquirer after the merger given cash consideration
EPS for acquirer + synergy/ shares in Acquirer
How do you calculate the maximum exchange ratio?
PT/PA ( 1 + S/ Vt)
* note that these value are the values before the takeover announcement
how to calcuate the underpricing for an IPO?
- it is esentially the change in the capital gain or loss:
- (new price- old price)/ old price x 100
how to calculate the value retained from the IPO when the spread is mentioned?
(set share price on IPO - (set share price on IPO x spread %)) x no. of shares bought
what is the NPV of the takeover to the Acquiring firm
synergy- premium
What is the greenshoe provision?
A greenshoe provision is when the underwriter issues more shares above the set no. of shares issued to cover the risk in not being able to sell all shares under the firm commitment. (when the underwriter buys all shares at the IPO at a discount and tries to sell all shares). This is usualyl 15% and it is sold when the issue is successful, and bought when the issue is not successful during shorting.
what is the difference between shareholder and stakeholder theory?
- shareholder theory focuses on maximising shareholders wealth (prioritising these stakeholders over others such as debtholders) and by doing so will create economic and societal welfare
- stakeholder theory focuses on valuing each statekolder equally, and that management should consider the interests of all groups affected by its actions
payout policy and agency costs
- it reduces the incentive for managers to engage in empire building or having excessive corporate perks with the excess cash, if a payout policy is in place ( through dividends or share repurchases
- payout policy may only occur based on contract rules that stipulate that management may only pay out a dividend given proper earnings, cashflow and working capital standards met.
payout policy and signalling
when payout signals certain information about the companies financial performance:
* increase in dividend: lack of investment opportunities/ dividend is due to increase cfor the foreseeable future
* decrease in dividend: negative financial position and has to save cash / to explot a new investment opportunity with a positive NPV
what is the winners curve?
*you will not always yield above market returns because your order will be filled when the stock goes down, and will be rationed when the price goes up. Thus, you only get the stock when you no longer want it and essentially investing in every stock does not yield above market returns.
how to calculate the NPV for the takeover and the acquiring firm
- NPV for the acquring firm= S- P(NPV of T post announcement)
- NPV for takeover firm= Value of T after announcement - synergy
explain the optimal capital structure for MM theory with taxes?
and for theory with taxes, financial distress cost, agency benefit cost of leverage, agency cost of leverage
the most optimal is when the costs and the benefits equally cancel each other out in the middle
what puzzle occurs when the market share price increase after the IPO
underpricing, when the underwriter sets the price of shares issued which ensures that its first day return is positive
How to calculate the increase in debt and equity after constant D/E ratio given?
- find out the Debt and equity proprtion of VL/EV
- find the value of the project (not NPV)
- divide the value of the project according to the debt and equity proportion
- the increases in D and E are the above proportions
how to calculate the net profit for waiting ex dividend, selling share and dividend
= ex dividend price - tax on the gain you rec (change in price from original to ex dividend) + dividend - tax on dividend
