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ADVANCED CORPORATE FINANCE : IZZAT AND NAJIHAH :boy::skin-tone-2::bulb:…
ADVANCED CORPORATE FINANCE :
IZZAT AND NAJIHAH
:boy::skin-tone-2::bulb::girl::skin-tone-2:
:fire:
CHAPTER 2: RAISING CAPITAL
:fire:
Definition
: Venture capital is financing for start-up firms small businesses (have a long-term growth potential).
Choosing a Venture Capitalist
:heavy_dollar_sign: Financial strength
:star: Style
:books: Reference
:telephone_receiver: Contacts
:heavy_check_mark: Exit Strategy
Cost of Issuing Securities
:diamonds:Gross spread
:diamonds:Other direct expenses
:diamonds: Indirect expenses
:diamonds: Abnormal Returns
:diamonds:Underpricing :
:diamonds: Green shoe option
:star:
CHAPTER 1: GOALS AND GOVERNANCE OF THE FIRM
:star:
Corporate Finance
Definition:
The area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions :
Involves
a) Investment decision
b) Dividend policy
c) Financing decision
d) Working capital management
Corporate governance
rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community).
Goals of Corporation
:<3: Profit Maximization
:<3: Maximization of the Shareholders Wealth
Main Areas
Capital structure
i. concern on ways in which the firm obtains fund
ii. find optimum mixture between debt and equity
iii. Dividend Policy
Net working capital
control of firm’s on short term assets (short term investment) and short term liabilities (short term financing) in ensuring efficient operation. :house_buildings:
Capital budgeting
identification of investment opportunities that are worth more to the firm than they cost to acquire.
Agency Problems
Principle / shareholders hire managers to run the companies :red_flag:
Conflicts of interest arise when managers serve their interest more than the companies’ interest and to certain extend may jeopardize the companies interest. :red_flag:
Solutions:checkered_flag:
i. Managerial compensation :!:
ii. Corporate control :!:
iii. Other stakeholders :!:
:factory:
CHAPTER 8: MERGERS AND ACQUISITIONS
Merger's Definition:
The complete absorption of one company by another, wherein the acquire firms retains its identity and the acquired firm ceased to exist as a separate entity.
Purpose
:four_leaf_clover: Promote growth
:four_leaf_clover: Acquire valuable assets
:four_leaf_clover: Increase market share
Acquisition's Definition:
Entirely new firm is created and both the acquired firm and the acquiring firm cease to exist.
Classifications
:shark:: Horizontal acquisition
:shark:: Vertical acquisition
:shark: Conglomerate acquisition
Defensive Tactics
:warning: Poison pill
:warning: Leverage buyout
:warning: Golden parachute
:warning: Crown jewel
:warning: White knight
:red_flag:
CHAPTER 6: EFFICIENT MARKETS AND BEHAVIORAL FINANCE
:red_flag:
Definition:
Is a market in which securities reflect all possible & relevant information
Terms
:walking::skin-tone-2:Random Walk Theory
Past movement or trend of stock prices or market cannot be used to predict its future movement
The movement of stock prices from day to day DO NOT reflect any pattern
:tada:Efficient Market Theory
Hypothesis comes in different strength depending the information available to investors
The more information that is incorporated into prices, the more efficient the market becomes
Behavioral Finance
Biased
:explode: Attitudes toward risk
:explode: Beliefs about probabilities
:explode: Individuals are too conservative
:explode: Another systematic bias is overconfidence
Concepts
:pen: Mental accounting
:pen: Herd behaviour
:pen: Anchoring
:pen: Emotional gap
:pen: Self-attribution
Lessons
:point_right::skin-tone-3:: Markets have no memory
:point_right::skin-tone-3: Trust market prices
:point_right::skin-tone-3: Read the entrails
:point_right::skin-tone-3: The Do-It-Yourself alternative
:point_right::skin-tone-3: Seen one stock, seen them all
:rocket:
CHAPTER 7: PAYOUT POLICY
:rocket:
Cash Dividend
Cash payment made directly to shareholders, and they are made in the regular course of business :moneybag:
Types: :shamrock: Regular :shamrock:Extra :shamrock: Special :shamrock:Liquidating
Cash dividend payment mechanics
Ex-dividend date :tada:
Date of record :tada:
Declaration date :tada:
Date of payment :tada:
Stock Repurchase
Company buy back it shares
Stock repurchases send a positive signal that
management believes that the current price is low
o Tender offer
– company states a purchase price and a desired number of shares
o Open market
– buys stock in the open market
Reasons
Reduce number of outstanding shares :arrow_down:
Boost Undervalued Shares :arrow_double_up:
Increase Earnings Per Share (EPS) :champagne:
Stock Dividend
: Pay additional shares instead of cash
Stock Split
: same as stock dividend except, it is expressed as ratio
:moneybag:
CHAPTER 4: CASH FLOW DETERMINATION
:moneybag:
Operating Cash Flows (OCF)
1. Bottom Up Approach
OCF= [(P-VC)Q-FC-DEPRECIATION] (1-TAX) + DEPRECIATION
2. Tax Shield Approach
OCF=(SALES-COSTS) X (1-TAX) + (DEPRECIATION X TAX)
Definition
: The net amount of cash and cash-equivalents being transferred into and out of a business
Special Cases
1, Evaluating cost cutting proposal (NPV)
Setting minimum bid price (price that makes NPV=0)
Equivalent annual cost (determine the OCF)
:classical_building:
CHAPTER 5: PROJECT ANALYSIS AND EVALUATION
:classical_building:
Forecasting Risk
:Bad decision made because of
errors in the projected cash flows :warning:
to reduce
: :check: Ensure product has its own quality
:check: Ensure it is produced at the lowest possible cost
What-If analysis
Scenario analysis
Best case :checkered_flag:
Worst case :red_flag:
Base case
effects when all variables changes
Proactive
Projecting investment return and losses
Helps future planning
Sensitivity analysis
effects on NPV if only one variable changes
Used to forecast profits
Break-even Analysis
Cash Breakeven
Find Q, assuming CF=0
Accounting Breakeven
Find Q, assuming NI=0
Financial Breakeven
Find OCF, when NPV=0 2.Find Q using calculated OCF
Degree of Operating Leverage
The higher the fixed cost, the higher
the DOL.
Capital rationing
:diamonds:
Hard rationing
Capital will never be available for this project
:bread:
Soft rationing
Temporary, often self-imposed
Firm has limited resources
:signal_strength:
CHAPTER 3: CAPITAL STRUCTURE
:signal_strength:
• Capital restructuring involves changing the amount of leverage a firm has without changing the firm’s assets i.e. increasing or decreasing % of debt to capital in order to maximize value of a company.
Capital Structure Theory: - Modigliani and Miller (M&M)
:pencil2:
M&M proposition I
: - The capital structure i.e. combination between equity and debt will not affect value of a company.
M&M Propositions I and II with corporate taxes
M&M Proposition I and taxes
M&M proposition I stated that Vu= VL, if no cash effect.
Vu=(EBIT x (1-Tc))/Ru
Ru=cost of unlevered firm
Vl=Vu+Tc xD
M&M proposition II and taxes
WACC (RA) = (E/V) RE + (D/V)RD
and by rearrange it we can get
RE = RA + (RA – RD) (D/E)
where WACC will not change whatever the composition between equity and debt. But the more you support your capital with debt, the riskier it will be to the s/h (RE)
WACC with
tax
effect:
= WACC (RA) = (E/V) RE + (D/V) (RD) (1-Tc)
To find WACC need to find new RE which can use the formula below:-
RE = Ru + (Ru – RD) (D/E) (1-Tc)
:pencil2:
M&M proposition II
: - states that the value of the firm depends on three things:
1) Required rate of return on the firm's assets
(Ra)
2) Cost of debt of the firm
(Rd)
3) Debt/Equity ratio of the firm
(D/E)
o The required rate of return on equity (Re) increases as the firm’s debt-equity ratio increases.
o Even though the Re increases but the Cost of capital (WACC) remain the same.
• WACC (RA) = (E/V)RE + (D/V)RD
RE = RA + (RA – RD) (D/E)