Sources Of Finance Flashcards
Earnings retention method
G = b x r
B is % earnings retained
R is the ARR
ARR=PAT/Opening SH funds
Dividend growth model
Growth = (old/new div)^1/n
Take the oldest and newest
Pros of CAPM
Directly links risk & return
Used when Share price unknown
Cons of CAPM
Assumes shareholders diversified
Assumes inputs remain same
Assumes investors can burrow and deposit at the risk free rate
Systematic risks grouped into single beta
Pros of DVM
Calculates Ke based on market data
Cons of Ke
Constant dividend growth assumes - unrealistic
Identifying ex-div share price can be hard for listed companies & worse for unlisted
Kp preference shares
Kp = D0 / P0
Dividend divided by share price
Kd of Irredeemable debt
Kd= (interest x [1-T]) / P0
T is tax, P0 is price
Kd bank debt
Kd = interest rate x (1-T)
Kd of Redeemable debt
Find the IRR using formula
RATE(1,2,3,4)
Then multiply by 1-T
1 NPER - number of periods
2 PMT - interest paid in any single period
3 PVAL - present value/market price (negative)
4 FVAL - value paid at maturity
Kd convertible debt
Same as redeemable debt but use the higher of redemption value or the market value of the future shares
Current share price x (1+g)^n = future
M&M no tax
With no tax there is not optimum capital structure and the WACC is the same at all levels of gearing
M&M with tax
Companies with debt have a higher total market value and hence a lower WACC
Optimal structure to gear up as much as possible
Drawbacks of M&M
Bankruptcy risks and costs Tax exhaustion Agency cost (covenants/board impacts) Availability of finance (hard to get loan) Issue costs
APT
Arbitrage Pricing Theory
Like CAPM assumes diverse portfolio
Each systematic factor has its own beta factor
