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ADVANCED CORPORATE FINANCE (ATHIRAH AND SYAZWAN) (CHAPTER 2: RAISING…
ADVANCED CORPORATE FINANCE (ATHIRAH AND SYAZWAN)
CHAPTER 1: GOALS AND GOVERNANCE OF THE FIRM
3 MAIN AREAS
1. CAPITAL BUDGETING:
Financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire.
2. CAPITAL STRUCTURE:
Financial manager concerns ways in which the firm obtains and manages the long-term financing it need to support its long term investment
WORKING CAPITAL MANAGEMENT:
The daily control of firm's on short term assets (short term investment and short term liabilities (short term financing in ensuring efficient operation
DEFINITION:
The area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions.
GOALS OF CORPORATION:
a) PROFIT MAXIMIZATION
b) MAXIMIZATION OF THE SHAREHOLDERS WEALTH
FORMS OF BUSINESS
1. SOLE PROPRIETORSHIP
2. PARTNERSHIP
3. CORPORATION
AGENCY PROBLEMS AND CORPORATE GOVERNANCE
AGENCY PROBLEMS:
Managers are agents for stockholders and are tempted to act in their own interests rather than maximizing value.
How to control?
i. Managerial compensation
ii. Corporate control
iii. Other stakeholders
CORPORATE GOVERNANCE:
The laws, regulations, institutions, and corporate practices that protect shareholders and other investors.
CHAPTER 2: RAISING CAPITAL
VENTURE CAPITAL:
Private financing for relatively new business in exchange for stock.
HOW TO CHOOSE A VENTURE CAPITALIST?
Style
References
Contacts
Exit strategy
Financial strength
EQUITY CAPITAL
IPO:
A company 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
RIGHTS OFFERING:
Allows current stakeholders to avoid the dilution that can occur with a new stock issue
ROLES OF UNDERWRITERS
1. Formulating the method used to issue the securities
2. Pricing the new securities
3. Selling the new securities
BASIC TERMINOLOGY OF INITIAL OFFERING
Initial Public Offering:
First offering of stock to the general public
Underwriter:
Firm that buys an issue of securities from a company and resells it to the public
Spread:
Difference between public offer price and price paid to underwriter
Prospectus:
Formal summary that provides information on an issue of securities
Underpricing:
Issuing securities at an offering price set below the true value of the security
TYPES OF UNDERWRITING
i) Firm Commitment
ii) Best Efforts
iii) Dutch Auction
CHAPTER 4: CASH FLOWS DETERMINATION
RELEVANT CASH FLOW:
The cash flows that should be included in a capital budgeting analysis are those that will only occur if the project is accepted
INCREMENTAL/NON CASH FLOW
SUNK COSTS
OPPORTUNITY COSTS
SIDE EFFECTS
FINANCING COSTS
NET WORKING CAPITAL
Special cases of discounted cash flow analysis
1) Evaluating cost cutting proposal (NPV)
2) Setting minimum bid price (determine thr price that makes NPV=0
3) Equivalent equipment with different useful lives (EAC)
PROJECT CASH FLOW CONSISTS:
1) Operating CF (OFC)
Bottom up approach
Top down appproach
Tax Shield Approach
2) Changes in NWC
3) Tax Shield Approach
CHAPTER 5 PROJECT ANALYSIS & EVALUATION
Break-even Analysis
Accounting Break-even
cash break-even
financial break-even
What if Analysis
scenario analysis
worst case
best case
Base case
Sensitivity Analysis
To see how sensitive NPV if one variables changes
Degree of Operating Leverage (DOL)
Firm relies on fixed cost
capital rationing
soft rationing
Hard rationing
Chapter 6: Efficients Markets and Behavioural Finance
Random walk theory
Past movement of stock prices cannot predict its future movement
Efficient Market Theory
weak EMH
semi strong EMH
Strong EMH
Lesson
Read the entrails
Market have no memory
Trust market prices
do it yourself alternative
see one stock,see them all
Behavioral Finance
Takes the view that markets are not fully efficient
Main concept
Self attribution
Anchoring
Hard behaviour
Mental accounting
Emotional gap
Biases Studied in BF
Too conservative
Beliefs about probality
Attitudes towards risk
overconfidence
CHAPTER 7 ; PAYOUT POLICY
Cash dividend
Fund paid to stakeholder generally as part of the corporation current earnings
How firm pay dividends?
declaration date
ex-devidend date
record date
payment date
Stock repurchase
A company buyback its own share from the market place because management consider the stock is undervalue
reason of repurchase stock
Reduce number of share outstanding
benefits from temporary undervalue stock
want to free out profit
company fiduciary duty
to show good image
Chapter 8: Mergers and Acquisitions
Merger:complete absorption of one company where is the acquiring firm retain their identity and the acquired firm ceases to exist as a separate entity.
acquired firm
acquiring firm
Acquisition ; One company purchase all or most of another company's shares or assets.
Type of acquisition
Horizontal Acquisition
Firm that same industry, have same business and competitors to each other
Conglomerate Acquisition
Bidder and Target firm are not related in the line of business
Vertical Acquisition
Two companies at the same industry but have different process of production
purpose?
Promote growth
Increase market share
Acquire valuable asset
Acq.Classification
Vertical
= Diff.process
Conglomerate
= Unrelated industry
Horizontal
= same Industry
Benefits of M&A
Reduction in capital needs
Revenue enhancement
Cost reduction
Defensive Tactics
Poison pill
Crown Jewel
Golden Parachute
Leverage Buyout
White Knight
CHAPTER 3: CAPITAL STRUCTURE
DEFINITION:
Capital restructuring involves changing the amount of leverage a firm has without changing the firm's assets
2 PROPOSITINS
M&M Proposition I:
The nature capital structure will not influence the value of a company as it not involves any cash flow changes.
Example:
Combination between equity and debt will not affect value of a company
M&M Proposition II:
States that the value of the firm depends on three things:
Required rate of return on the firm's assets
(Ra)
Cost of debt of the firm
(Rd)
Debt/Equity ratio of the firm
(D/E)
THE PECKING ORDER THEORY
IMPLICATIONS
No target capital structure
Profitable companies use less debt
Companies will want financial slack (internally generated cash flow):- Financial slack will help company to finance projects as they appear
FINANCIAL DISTRESS
Financial distress occurs when promises to creditors are broken or honoured with difficulty. Sometimes, it leads to bankruptcy.
COSTS?
1. Bankruptcy costs
2. Costs of financial distress short of bankruptcy
FINANCIAL DISTRESS GAMES
1. Risk Shifting
2. Refusing to contribute Equity Capital
OTHER GAMES
1. Cash In and Run
2. Playing for Time
3. Bait and Switch
SIGNALING HYPOTHESIS:
Managers posses inside information about their firm future performance, they use various signalling devices to convey information to the market.
FACTORS AFFECTING CAPITAL STRUCTURE
1. Size
2. Tangible Assets
3. Profitability
4. Market To Book
Evaluate NPV : Forecasting Risk
The possibility that errors in PCF will lead to incorrect decisions