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ADVANCED CORPORATE FINANCE developing-512 (CH7: PAYOUT POLICY :bank:…
ADVANCED CORPORATE FINANCE
CH6: EFFICIENT MARKETS & BEHAVIORAL FINANCE
:bookmark_tabs:
6 Lesson Of Market Efficiency
3)There are no financial illusions
4) Read the entrails
2) Seen one stock, seen them all
5) Trust Market Prices
1) Market have no memory
6) The do it yourself alternative
3 Degrees of Market Efficiency
b) Semi-Strong Form
- Market Prices reflect all Publicly available Information
c) Strong Form
- Market Prices reflect all Information both Public and Private
a) Weak Form
- Market Prices reflect all Historical Information
Market Efficiency
refers to the degree wich market prices reflect all available, relevant information
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.
CH1: GOALS & GOVERNANCE OF
THE FIRM :building_construction:
Definition:
A process involved in an attempt to obtain & allocate financial resources effectively & efficiently to achieve the company's objectives.
Goals of the firm
Profit Maximization
Maximization of shareholders wealth
Agency Theory:
Explain elements to organizational behavior through an understanding the relationship between the principals & the agents.
Corporate Governance:
The system of rules, practices & processes by which a company is directed & controlled.
Agency Problem/Conflict:
Exists between the actions taken by the agents of their own self interest than those of the principals. It is the result of a separation of management & ownership of the firm.
3 main areas that specifically concerned
Capital Structure:
The mixture of LTD & equity used by the firm to finance its operations
Capital Budgeting:
Financial manager tried to identify the investment opportunities that are worth more to the firm that they cost to acquire
Assets Management:
A firm's ST assets & ST liabilities. Managing firm's WC is a day-to-day activity to ensure firm has enough resources & avoiding costly interruptions.
CH8: MERGERS & ACQUISITIONS
:classical_building:
The reasons of merger and acquisition
Gaining a competitive advantage or larger market share
Diversifying products or services
Increasing Capabilities
Replacing Leadership
Cutting Costs
Acquisition
of stock is a way to acquire another firm with purchase the firm's voting stock
Merger
is acquiring all the assets and liabilities of the acquired firm
CH3: CAPITAL STRUCTURE :money_mouth_face:
Factors in Capital Structure Decision
Sales stability
Operating structure
Assets Structure
Profitability
Growth Rate
Taxes
Management Attitudes
Capital structure decision
Definition:
The capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth.
Cost of Financial Distress:
Costs arising from bankruptcy/distorted business decisions before bankruptcy
Pecking Order Theory:
Theory stating firms prefer to issue debt over equity if internal finances are insufficient.
Implications
Adapt target dividend payout ratios to investment opportunities while avoiding :small_red_triangle: in dividends.
Internally generated cash flows is sometimes > than capital expenditures, other times not.
If more: firm pays off debt/invests in marketable securities
If less: firm generates cash balance/sells marketable securities
Firms prefer internal finance
If external finances are required, firms issue the safest security first.
Debt :arrow_right: Hybrid securities :arrow_right: Equity
Factor Affecting Capital Structure
Size:
Large firms tend to have :arrow_up: debt ratios.
Tangible assets:
Firm with :arrow_up: ratios of FA to TA have :arrow_up: debt ratios.
Profitability: :arrow_up:profitable firms have :arrow_down: debt ratios.
Market to book: Firm with :arrow_up: ratios of market to book value have :arrow_down: debt ratios.
Agency Cost of Equity:
A problem arising from the conflict of interest created by the separation of management from ownership (the stockholders) in a publicly-owned company.
CH4: CASH FLOW DETERMINATION :newspaper:
Special Cases
Evaluating cost cutting proposal (NPV)
Setting minimum bid price
Evaluating equipment with different useful life (EAC)
Changes in Net Working Capital (NWC)
Initial NWC +/- :small_red_triangle: in NWC +/- NWC recovery
Operating Cash Flows (OCF)
Bottom up approach
Tax shield approach
Capital Spending
Incremental Cash Flows
:black_small_square: Sunk Costs
:black_small_square: Opportunity Costs
:black_small_square: Side Effects
:black_small_square: Net Working Capital
:black_small_square: Financing Costs
:black_small_square: Other Issues
CH2: RAISING CAPITAL :moneybag:
Venture Capital
How to choose Venture Capitalist (VC)
Financial strength
Style
References
Contacts
Exit Strategy
Definition
: :moneybag: provided by investors to startup firms & small businesses with perceived long-term growth potential.
Equity Capital
Initial Public Offering (IPO)
: A company's first equity issue made available to the public.
Seasonal Equity Offering (SEO)
: A new equity issue of securities by a company that has previously issued securities to the public.
Right Offering
: Issue a common stock offered to existing shareholders at a subscription price within a subscription period.
Allows current shareholders to avoid the dilution (loss in existing shareholders value) that can occur with a new stock value
Rights are given to the shareholders
Specify number of shares that can be purchased
Specify purchase price
Specify time frame
Why new equity sales may resulted to :arrow_down: existing stock price
Debt usage
Issue cost
Managerial information
CH5: PROJECT ANALYSIS & EVALUATION
:notebook_with_decorative_cover:
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.
b) Best Case Scenario
c) Worst Case Scenario
2) 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
:star: Cash Breakeven
:star: Financial Breakeven
:star: Accounting Breakeven
CH7: PAYOUT POLICY
:bank:
Stock Repurchase:
the purchase by a corporation of its own shares of stock also known as buyback
Stock Splits
essentially same thing as stock dividends except that a split is expressed as ratio instead of %.
Stock Dividends
is a payment made by a firm to its owner in the form of stock,
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
How Firms pay Dividends
:small_orange_diamond: Payment Date
:small_orange_diamond: Record Date
:small_orange_diamond: Ex-dividend date
:small_orange_diamond: Declaration date
4 Types of dividends
b) Extra Dividends
c) Special Dividends
d) Liquidating Dividends
a) Regular Cash Dividends
Dividends Paying Methods
a) Residual
- To rely internally generated equity to finance any new project,
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.
