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ADVANCED CORPORATE FINANCE 58e8fc32eb97430e819064b5 (Chapter 1 : Goals and…
ADVANCED CORPORATE FINANCE
Chapter 1 : Goals and Governance of the Firm
AGENCY PROBLEMS & CORPORATE GOVERNANCE
The system of rules, practices and processes by which a company is directed and controlled.
Exist between the action taken by the agent of their own self interest than those of the principals
GOALS OF THE CORPORATION
:lock:Profit maximization
:lock:Shareholder wealth maximization
DEFINITION
A process involved in an attempt to obtain and allocate financial resources effectively and efficiently to achieve the company's objective
THE ROLE OF FINANCIAL MANAGER & THE OPPORTUNITY COSTS OF CAPITAL
CONTROLLER
: Responsible for handle cost and financial accounting and data processing
TREASURER
: Responsible for managing the firm's cash and credit, capital expenditure and financial planning
3 MAIN AREAS
:lock: Capital Budgeting
:lock: Capital Structure
:lock: Asset Managements
Chapter 3 : Capital Structure (Limits to the use of debt)
COST OF FINANCIAL DISTRESS
DEFINITION
:star: Cost arising from bankruptcy or distorted business decisions before bankruptcy
FINANCIAL DISTRESS
:star:Occurs when promises to creditors are broken or honored with difficulty
BANKRUPTCY COSTS
DIRECT
: Legal and administrative cost of bankruptcy
INDIRECT
: nearly impossible to measure
CAPITAL STRUCTURE & COST OF EQUITY CAPITAL
M&M WITHOUT TAX
M&M Proposition I
:explode: State that the value of the firm is independent of the firm's capital structure
:explode: changing in capital structure will not change the firm's total value
:explode: WACC will remains the same even though the firm change its capital structure
M&M Proposition II
:explode: state that the firm's cost of equity capital is a positive linear function of the firm's capital structure
:explode: As the firm increase to the debt equity ratio the increase in leverage risk of the equity and therefore the required rate of return
:explode: Thus the change in the capital structure weights is exactly offset by the change in the cost of equity, therefore WACC is the same
M&M PROPOSITIONS WITH TAX
M&M Proposition I
:warning: state the value of the firm increase as the total debt increase because of the interest tax shield
:warning: Firms WACC decrease as the firm use more debut or relies more heavily on debt financing
M&M Proposition II
:warning: State that the firm's cost of equity rise as the firm relies more heavily on debt financing
THEORY
TRADE OFF THEORY
:smiley: company prefer to issue debt, where by having debt they can require to pay interest and benefit themselves with tax shield
PECKING ORDER THEORY
:smiley: Firm prefer to issue debt over equity if internal finance is not sufficient - asymmetric information( the managers know more about their companies' prospects, risks and values than the outsider)
IMPLICATIONS
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
SIGNALLING HYPOTHESIS
DEFINITION
: Manager possess inside information about their firms future performance, they may use various signalling device to convey information to the market
FACTOR AFFECTING CAPITAL STRUCTURE
:star: Profitablity
:star: Size
:star: Tangible asset
:star: Market to book ratio
Chapter 7 : Payout Policy
TYPES OF DIVIDENDS
Extra Dividend :<3:
Special Dividend :<3:
Regular Cash Dividend :<3:
Liquidating Dividend :<3:
HOW FIRMS PAY DIDVIDENDS
Ex-Dividend Rate :<3:
Declaration Tax :<3:
Record date :<3:
Payment Date :<3:
STOCK DIVIDEND & STOCK SPLIT
Stock Split is 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
Stock Dividend is payment made by a firm to its owner in the form of stock, diluting the value of each share outstanding
DIVIDEND
: payment made out of a firm's earning to its owner inter form of cash or stocks
STOCK REPURCHASE
DEFINITION
: the purchase by a corporation of its own shares of stock also known as buyback
Chapter 8 : Mergers and Acquisition
DEFINITION
MERGER
Merger is the complete absorption of one company where is the acquiring firm retains their identify and the acquired firm ceases to exist as a separate entity
ACQUISITIONS
TYPE OF ACQUISTION
Horizontal Acquisition :red_flag:
Vertical Acquisition :red_flag:
Conglomerate Acquisition :red_flag:
Acquisition is one company purchase all or most of another company's shares or assets
DEFENSIVE TACTICS
Golden Parachute :red_flag:
Crown Jewel :red_flag:
Leverage Buyout :red_flag:
White knight :red_flag:
Poison Pills :red_flag:
Chapter 2 : Raising Capital
VENTURE CAPITAL
VENTURE CAPITALIST CHARACTERISTICS
:green_cross: Financial Strength
:green_cross: Style
:green_cross: References
:green_cross: Contact
:green_cross: Exit Strategy
DEFINITION
:tada: private financing for relatively new businesses in exchange for stock
EQUITY CAPITAL
RIGHT OFFERING
DEFINITION
: Issue of common stock offered to existing shareholders at a subscription price within a subscription period.
CASH OFFER
IPO
: A companies' 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
Chapter 5 : Project Analysis and Evaluation
WHAT-IF ANALYSIS
SENSITIVITY ANALYSIS
Determine what happen to NPV when only one variable is changed :black_flag:
Used by managers for investors to forecast profit :black_flag:
SCENARIO ANALYSIS
Best Case :black_flag:
Worst Case :black_flag:
Base Case :black_flag:
BREAK-EVEN ANALYSIS
Accounting break-even :checkered_flag:
Cash break-even :checkered_flag:
Financial break-even :checkered_flag:
FORECASTING RISK
: Bad decision made because of errors in the projected cash flows
OPERATING LEVERAGE
Sales must be higher than the minimum break even point in order to generate profit :checkered_flag:
IMPLICATIONS
: the higher the fixed cost, the higher the operating leverage
CAPITAL RATIONING
Hard Rationing :checkered_flag:
Soft Rationing :checkered_flag:
DEFINITION
: the act replacing restrictions on the amount of new investments or projects undertaken by a company
Chapter 6 : Efficient Market and Behavioral Finance
BEHAVIORAL FINANCE
The behaviors of investor and financial practitioners that influences by psychological and biases.
EFFICIENT MARKET
DEFINITION
: The market in which securities reflect all possible and relevant information
TYPES OF EFFICIENT MARKET
Efficiency Market Theory :no_entry:
Random Walk Theory :no_entry:
THE 5 LESSONS OF MARKET EFFICIENCY
:!:Read the entrails
:!: The DIY alternatives
:!: Seen one stock, seen them all
:!: Market have no memory
:!: Trust the market
Chapter 4 : Cash Flow Determination
PROJECTED CASH FLOW
:check: Changes in Net Working Capital
:check: Capital Spending
:check: Operating Cash Flow
Tax Shield Approach
-
OCF = (Sales – costs) x (1 – Tax rate) + (depreciation x tax rate)
OCF = [(P-VC)Q – FC] x (1 – tax rate) + (depreciation x tax rate)
Top-Down Approach
OCF = Sales – Costs – Taxes
Bottom Up Approach
OCF = Net Income + Depreciation
OCF = ((P-VC)Q – FC – depreciation)(1-tax) + depreciation
SPECIAL CASES
:check: Setting Minimum Bid Price (NPV = 0)
:check: Cost Cutting Proposal
:check: Equivalent Annual Costs
INCREMENTAL CASH FLOW
:check: Opportunity Cost
:check: Sunk Cost
:check: Net Working Capital
:check: Financing Cost
