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Advanced Corporate Finance (CHAPTER 1 - GOALS AND GOVERNANCE OF THE FIRM…
Advanced Corporate Finance
CHAPTER 3 - CAPITAL STRUCTURE
FINANCIAL LEVERAGE & CAPITAL RESTRUCTURING
M&M Proposition (without tax)
M&M Proposition I
The value of the firm is independent of the firm's capital structure
M&M Proposition II
States the firm's cost of equity capital is a positive linear function of the firm's capital structure
M&M Proposition (with tax)
M&M Proposition I
states the value of the firm increases as total debt increases because of the interest tax shield
M&M Proposition II
States the firm's cost of equity rises as the firm relies more heavily on debt financing
COST OF FINANCIAL DISTRESS
- Costs arising from bankruptcy or distorted business decisions before bankruptcy
TRADE-OFF THEORY
- capital structure is based on trade off between tax saving and distress costs of debt
PECKING ORDER THEORY
- Firms prefer to issue debt over equity if internal finances are insufficient
Asymmetric Information
- A term indicating that managers know more about their companies' prospects, risks, and values than do outside investors
Signalling Hypothesis
- Managers possess inside information about their firms future performance, they may use various signalling devices to convey information to the market
Implication of Pecking Orde
r
1) Firms prefer internal finance
2) Internal equity may be better than external equity
3) Financial slack is valuable
4) If external capital is required, debt is better
Factors Affecting Capital Structure
Tangible Assets
Profitability
Size
Market to book
CHAPTER 5- PROJECT ANALYSIS AND EVALUATION
FORECASTING RISK
- The possibility that errors in projected cash flow will lead to incorrect decision
SCENARIO ANALYSIS
1) Base case scenario
- value provided in the question
2) Best case scenario
- Price :arrow_up: , Quantity :arrow_up:, Fixed Cost :arrow_down: and Variable Cost :arrow_down:.
3) Worst case scenario
- Price :arrow_down: , Quantity :arrow_down: , Fixed Cost :arrow_up:and Variable Cost :arrow_up:.
SENSITIVITY ANALYSIS
- Useful in pinpointing the areas are where forecasting risk is especially severe
Freeze all variable except one
BREAKEVEN ANALYSIS
Accounting breakeven (NI=0)
Financial breakeven (NPV=0)
Cash breakeven (OCF=0)
CHAPTER 8- MERGER AND ACQUISITION
Merger
- The complete absorbtion of one company where the acquiring firm retain their identity and acquired firm ceases to exists as a separate entity
Acquisition
- one company purchase all or most of another company's shares or assets
Types of acquisitions
2) Vertical Acquisition
3) Conglomerate Acquisition
1) Horizontal Acquisition
Defensive Tactics
Crown Jewel
Leverage buy out
White Knight
Poison pill
Golden Parachute
:heavy_dollar_sign:CHAPTER 4 - CASH FLOW DETERMINATION I AND II
PROJECT'S CASH FLOW
Changes in net working capital (NWC)
Capital Spending
Operating Cash Flow (OCF)
Bottom up approach
Tax shield approach
:briefcase:SPECIAL CASES
1) Evaluating cost cutting proposal (NPV)
2) Setting minimum bid price (NPV=0)
3) Evaluating equipment with different useful life (EAC)
CHAPTER 2 - RAISING CAPITAL
:notebook:DEFINITION VENTURE CAPITAL
- Money provided by investors to start up firms and small businesses with perceived long term growth potential.
:question:CHOOSING VENTURE CAPITALIST
Financial Strength
Style
References
Contacts
Exit Strategy
EQUITY CAPITAL
1) Cash Offer (IPOs and SEOs)
IPO - A company's first equity issue made available to the public
SEO - A new equity issue of securities by a company that has previously issued securities to the public
2) Right Offer
DEFINITION
- Issue of common stock offered to existing shareholders at a subscription price within a subscription period
DILUTION EFFECTS
Percentage of ownership
EPS and Market Value
CHAPTER 6 - EFFICIENT MARKETS AND BEHAVIORAL FINANCE
:notebook:DEFINITION
- a market in which securities reflect all possible and relevant information
:woman-walking::skin-tone-4:RANDOM WALK THEORY
Past movement or trend of stock prices cannot be used to predict its future movement
EFFICIENT MARKET THEORY
Weak Form EMH
Semi-Strong EMH
Strong Form EMH
BEHAVIORAL FINANCE
Psychological influences and biases affect financial behaviorals of investors and financial practitioners
:check:5 LESSONS OF MARKET EFFICIENCIES
Read the entrails
Seen one stock, seen them all
Market have no memory
The Do-it-yourself alternative
Trust market prices
CHAPTER 1 - GOALS AND GOVERNANCE OF THE FIRM
:notebook:DEFINITION
- A process to obtain and allocate financial resources effectively and efficiently to achieve the company's objectives.
OBJECTIVES OF THE FIRM
1) Profit maximization :moneybag:
2) Maximization of shareholder's wealth :silhouettes:
3 MAIN AREAS
capital structure
asset management
capital budgeting
CORPORATE GOVERNANCE
- The system of rules, practices and processes by which a company is directed and controlled.
AGENCY THEORY
- The relationship between principals (shareholders) and agents (firm managers).
AGENCY PROBLEM
- action taken by the agents of their own self-interest which result of a separation of management and ownership of the firm.
CHAPTER 7: PAYOUT POLICY
Method of Payment
Payment Date
Declaration Date
Record Date
Ex-Dividend Date
Stock Repurchase
- a transaction whereby the company buys back its own shares from the marketplace
Cash Dividend
- funds or money paid to stockholder generally as a part of the corporation current earnings and accumulated profits