Please enable JavaScript.
Coggle requires JavaScript to display documents.
ADVANCED CORPORATE FINANCE (FARISAH & FASIHAH) :bulb: :two_women…
ADVANCED CORPORATE FINANCE
(FARISAH & FASIHAH)
:bulb: :two_women_holding_hands:
CHAPTER 5 - PROJECT ANALYSIS AND EVALUATION
:fire:
1)Scenario Analysis
- To investigate the changes in NPV and there have 3 different scenarios
a) Base Case Scenario
- It is used to compared with the Best Case Scenario and Worst Case Scenario. The value has given in the question
b) Best Case Scenario
- It is what people want to happen and are working to achieve. To calculate this scenario, it should take
Price and Quantity,
Variable cost and Fixed Cost
c) Worst Case Scenario
- It is considers the most severe possible outcome and people always want to avoid . To calculate this scenario, it should take
Variable cost and Fixed Cost,
Price and Quantity
Sensitivity Analysis -
Financial model that determines how target variables are affected based on changes in other variables known as input variables
4) Breakeven Analysis
- It is financial calculation for determining the number of products or services a company should sell to cover its costs
b) Accounting Breakeven
c) Financial Breakeven
a) Cash Breakeven
3) Degree of Operating Leverage
- How much the operating income of a company will change in response to a change in sales.
Capital Rationing
- Act of placing restrictions on the amount of new investments or projects undertaken by a company
b)
Soft Rationing
a)
Hard Rationing
CHAPTER 7 - PAYOUT POLICY
:star:
Dividend
is a payment made out of a firm's earning to its owners in the form of either cash or stock
Distribution
is a payment made by a firm to its owners from sources other that current/ accumulated retained earnings
4 Types of dividend
s
a) Regular Cash Dividends
b) Extra Dividends
c) Special Dividends
d) Liquidating Dividends
Stock Repurchase,
the purchase by a corporation of its own shares of stock also known as buyback
Dividends Paying Methods
a) Residual
- To rely internally generated equity to finance any new project, the benefit is to allows a company to use their retained earnings/ residual income to invest back into the company
b) Stable
- Companies consistently pay a div each year regardless of earnings fluctuations
c) Hybrid
- The final approach is to combines the residual and stable dividend policies. Companies use hybrid approach to establish a set of div which represents a relatively small portion of yearly income
How Firms pay Dividends
1) Declaration date
2) Ex-dividend date
3) Record date
4)Payment date
Stock Dividends
is a payment made by a firm to its owner in the form of stock, diluting the value of each share outstanding
Stock Splits
essentially same thing as stock dividends except that a split is expressed as ratio instead of %. When a split is declared, each share is split up to create additional shares
CHAPTER 8 - MERGER AND COST OF AN ACQUISITION
:<3:
Merger
is acquiring all the assets and liabilities of the acquired firm
Acquisition
of stock is a way to acquire another firm with purchase the firm's voting stock
The reasons of merger and acquisition
Increasing Capabilities
Gaining a competitive advantage or larger market share
Diversifying products or services
Replacing Leadership
Cutting Costs
DEFENSIVE TACTICS
Golden parachute
White knight
Poison pills
Crown jewel
Leverage Buyout
CLASSIFICATION OF ACQUISITION
Horizontal Acquisition
Vertical Acquisition
Conglomerate Acquisition
Gains from Acquisition
Synergy
Revenue Enhancement
Cost reduction
Lower taxes
CHAPTER 6 - EFFICIENT MARKET AND BEHAVIORAL FINANCE
:explode:
Market Efficiency
refers to the degree wich market prices reflect all available, relevant information
If markets are efficient, then all information is already incorporated into prices and there is no way to beat the market because there re no undervalued/ overvalued securities available
3 Degrees of Market Efficiency
a) Weak Form
- Market Prices reflect all Historical Information
b) Semi-Strong Form
- Market Prices reflect all Publicly available Information
c) Strong Form
- Market Prices reflect all Information both Public and Private
Random Walk Theory
- The movement of stock prices from day to day not reflect any pattern. The movement of stock prices is randomly and cannot be predicted.
It also corresponds to the belief that markets are efficient and it is not possible to beat the market because stock prices reflect all variable information
6 Lesson Of Market Efficiency
1) Market have no memory
5) Trust Market Prices
4) Read the entrails
6) The do it yourself alternative
2) Seen one stock, seen them all
3)There are no financial illusions
CHAPTER 1 - INTRODUCTION TO CORPORATE FINANCE
:pen:
Definition:
A process involved in an attempt to obtain & allocate financial resources effectively to achieve the company's obj.
Objectives of a firm:
a) Profit maximization
b) Maximization of shareholders wealth
Concern 3 main areas:
a) Capital Budgeting:
Financial manager tries to identify the investment opportunities that are worth more than they cost to acquire
b) Capital structure:
Refers to the mixture of LTD & equity used by the firm to finance its operations
c) Assets management:
Refer to a firm's S/T assets & S/T liabilities
CORPORATE GOVERNANCE:
The system of rules, practices & processes by which a company is directed & controlled
AGENCY THEORY:
Explain elements to organizational behavior through an understanding the relationship between principals & agents
AGENCY PROBLEM:
Exists between the actions taken by the agents of their own self interest than those of the principals
CHAPTER 2 - RAISING CAPITAL
:arrow_double_up:
Venture Capital:
Refers to financing for new, often high-risk, ventures
Not only provide money but also in other ways such as knowledge & experience
Choosing a venture capitalist:
1) Financial strength
2) Style
3) References
4) Contacts
Exit strategy
Alternative issue methods
Equity sales, have 2 public issues:
1) GENERAL CASH OFFER:
An issue of securities offered to general public on a cash basis
2) RIGHTS OFFER:
A public issue of securities which are first offered to existing shareholders
IPO:
A company's first equity issue made available to the public
SEASONED EQUITY OFFERING (SEO):
A new equity issue of securities by company that previously issued securities to the public
CHAPTER 3 - CAPITAL STRUCTURE
:moneybag:
CAPITAL STRUCTURE & COST OF EQUITY CAPITAL
M&M Proposition (without Tax)
1) M&M Proposition I (Pie Model)
: The proposition that the value of firm is independent of firm's capital structure
No effect on WACC value and apply no tax
2) M&M Proposition II:
The proposition that states the firm's cost of equity capital is a (+ve) linear function of firm's capital structure
M&M Proposition (With Tax)
M&M Proposition I:
The proposition states the value of firm :arrow_up: as total debt :arrow_up: because of interest tax shield
M&M Proposition II:
The proposition state the firm's cost of equity :arrow_up: as the firm relies more heavily on debt financing
Cost of Financial Distress:
depends on the probability of distress and magnitude of cost encountered if it occurs
Financial distress:
occurs promises to creditor are broken or honored with difficulty and sometimes it will lead to bankruptcy
Bankruptcy Cost
DIRECT:
The cost that directly associated with bankruptcy, such as legal and administrative expenses
INDIRECT:
The cost of avoiding a bankruptcy filing incurred by a financially distressed firm
TRADE-OFF THEORY
: Theory that capital structure is based on trade off between tax saving and distress cost of debt
PECKING ORDER THEORY
: Theory stating firms prefer to issue debt over equity if internal finances are insufficient
It starts with
"asymmetric information"
: A term indicating that managers know more about their companies' prospects, risks and value that do outside investors
:black_right_pointing_double_triangle_with_vertical_bar:
INTERNAL FINANCES:
such as profits, retained earnings, capital
:black_right_pointing_double_triangle_with_vertical_bar:
DEBT FINANCING
:black_right_pointing_double_triangle_with_vertical_bar:
EQUITY FINANCING
IMPLICATIONS OF PECKING ORDER
1) Firm prefer internal finance
2) Internal equity is better than external equity
3) Financial slack is valuable
4) If external capital is required, debt is better
FACTORS AFFECTING CAPITAL STRUCTURE
1) Size:
Large firm tend to have :arrow_up: debt ratios
2) Tangible Assets:
Firm with :arrow_up: ratios of fixed asset to total assets have :arrow_up: debt ratios
3) Profitability
More profitable firms have :arrow_down: debt ratios
4) Market To Book:
Firms with :arrow_up: ratios of market-to-book value have :arrow_down: debt ratios
SIGNALING HYPOTHESIS:
Managers posses inside information about their firm future performance, they use various signaling devices to convey information to the market
CHAPTER 4 - CASH FLOWS DETERMINATION
:check:
RELEVANT CASH FLOWS:
A change in the firm overall future cash flow that comes about as a direct consequence of the decision to take that project
INCREMENTAL CASH FLOWS:
The difference between a firm's future cash flows with a project or without the project
Some common pitfalls in incremental CF
1) Sunk Cost:
:red_cross: A cost that has already been incurred and cannot be removed & therefore should not be considered in an investment decision
2) Opportunity Cost:
The :red_cross: most valuable alternative that is given up if a particular investment is undertaken
3) Net Working Capital CA- CL):
:check: A project generally need some amount of cash on hand to pay any expenses that arise
4) Financing Cost:
:red_cross: In analyzing a proposed investment, we will not include interest paid / any other financing cost such as dividends
PROJECT CF Consist:
1) Operating CF (OCF)
2) Changes in NWC
3) Capital Spending
Bottom up approach
Tax shield Approach
Top down approach
SPECIAL CASES:
1) Evaluating cost cutting proposal (NPV)
2) Setting minimum bid price
(Determine the price that makes NPV=0)
3) Evaluating equipment with different useful lives
(EAC)
