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ACF SUMMARIZATION (AMIRAH SHAHIRAH & AHMAD SYAHRIZAL) (Chp 3: Capital…
ACF SUMMARIZATION
(AMIRAH SHAHIRAH & AHMAD SYAHRIZAL)
Chp 1: Goals & Governance of Firm
Goals
💣 Maximizing the shareholders wealth
💣 Maximization of total market value of existing shares
💣 Business expansion
💣 Sustaining business operations
Governance
🌻 Corporate Finance:
System of rules, practices and processes of a firm
🌻 Agency Theory:
Explain the relationship between shareholders and firm managers (organizational behaviour)
🌻 Agency Problem:
Exists when agents act on his own self interest instead of making decision according to the shareholder's intention
Main Areas
📝 Capital Budgeting:
Identify which investment has return > cost
📝 Capital Structure:
Combination of Debt and Equity for business operations
📝 Assets Management:
Explains how firm manages its short-term assets and liabilities
Chp 3: Capital Structure
Theoretically,
M&M Proposition with Tax
🌞 M&M Proposition I:
Value of firm increase when total debt increase due to tax shield
🌞 M&M Proposition II:
Firm's cost of equity rise due to debt financing taken
M&M Proposition without Tax
🌚 M&M Proposition I:
Value of firm is independent of firm's capital structure, indicates no changes in WACC
🌚 M&M Proposition II:
Firm's cost of equity is a positive linear function of firm's capital structure
Factors affecting Capital Structure
🐰 Size of firm
🐰 Profitability
🐰 Tangible assets possessed
🐰 Market to book value
Pecking Order:
Firms prefer to issue debt due to inadequate internal finance
Signalling Hypothesis
Cost of Financial Distress
:
Happen due to high default risk causing debtor unable to repay the creditors upon maturity
Chp 6: Efficient Market Theory & Behavioural Finance
Efficient Market
Random Walk Theory
:
Past movement of stock prices cannot predict its future movement
Efficient Market Theory
Weak-form EMH:
Current stock prices full reflect all past market data
Semi-Strong EMH:
Market is efficient, reflecting all public available information
Strong-form EMH:
Stock prices contain informations both public and prviate
Lessons of Efficient Market
😆 Markets have no memory
😆 Trust market price
😆 Read the entrails
😆 Do-it-yourself alternative
😆 Seen one stock, seen them all
Behavioural Finance
Biases in Behavioural Finance
💸 Attitudes towards risk
💸 Beliefs about probabilities
💸 Most individuals are too conservative
💸 Overconfidence
Main concepts
✔ Mental accounting
✔ Herd behaviour
✔ Anchoring
✔ Emotional gap
✔ Self-attribution
Chp 8: Mergers & Acquisitions
Definitions:
Merger
:
Complete absorption of a company
where acquiring firm retains their
identity and acquired firm
ceases to exist as separate
Acquisiitons:
A firm purchases all or most of
another company shares/assets
Classifications
Horizontal acquisition
:
Firm in a same industry, compete with each other
Vertical acquisition:
Firms from same industry but different process of production
Conglomerate acquisition:
Both firms are not related in the line of business
Purpose of M&A
💯 Increase market share
💯 Leverage synergies to create even more value
💯 Achieve vertical integration
💯 Promote growth
💯 Acquire valuable assets
Advantages
Target firm:
👓 Reduce cost
👓 Reduce risk
Bidder firm:
💄 More profits
💄 Reduce competition
💄 Company growth
Disadvantages
Bidder firm
🔰 Customer impact
🔰 High initial capital
Target firm
🐢 Loss workers
🐢 Losing customer's confidence
🐢Brand become damage
Defensive tactics
🍟 Poison pill
🍟 Leverage buyouts
🍟 Golden parachute
🍟 Crown jewel
🍟 White knight
Chapter 5: Project Analysis & Evaluation
Breakeven Analysis
Financial Breakeven
Find OCF, when NPV=0
Find Q using calculated OCF
Accounting Breakeven
Find Q, assuming NI=0
Cash breakeven
Find Q, assuming CFI=0
Capital Rationing
Soft Rationing
Temporary, often self imposed
Firm has limited resources
Hard Rationing
Capital will never be available for this
Degree of operating
leverage (DOL)
The higher the fixed cost, the higher the DOL
Forecasting Risk
Bad decision made because of
errors in the projected cash flows
What-If-Analysis
Scenario Analysis
💳 Best case
💳 Base case
💳 Worst case
Sensitivity Analysis
🔫 effects on NPV if only one variable change
🔫 Used to forecast profits
Effects when all available changes
💊 Helps future planning
💊 Proactive
💊 Projecting investment return and losses
Chp 7: Dividend Policy
Types of Dividends
👛 Cash Dividend
👛 Stock dividend
👛 Stock split
👛 Stock repurchase
Types of dividend policy
Constant growth dividend policy
dividends increased at a constant rate each year
Constant payout ratio
Pay a constant percent of earnings each year
Residual dividend policy
Companies first use the cash flow to fulfil
necessary capital expenditures and the
remaining is paid out to shareholders
Compromise dividend policy
Goals, ranked in order of policy
Dividends and Signals
Dividend Increases
-Management believes it can be sustained
-Signal of a healthy, growing firm
Dividend Decreases
-Management believes it cannot sustain the current level of dividends
-Signal of a firm that is having financial difficulties
Chp 2: Raising Capital
Venture Capitalism
How to choose a venture capitalist
🐣 Financial Strength
🐣 Style
🐣 References
🐣 Contacts
🐣 Exit Strategy
Equity Capital
IPO
A company's first equity issue
made available to the public
SEOs
A new equity issue of securities
by a company that has previously
issued securities to the public
Underwriting
Roles of Underwriters
🎓 Formulating the method used to issue securities
🎓 Pricing the new securities
🎓 Selling the new securities
Types of Underwritings
⌚ Firm commitment
⌚ Best efforts
⌚ Dutch auction
Dilution Effects
💲 Changes in percentage of ownership
due to increasing NOS
💲 EPS and market value
will dilute if NPV of project
is 0 or -ve value
Chp 4: Cash Flow Determination
Definition
:
The net amount of cash-equivalent
being transferred into and out of a business
Operating cash flow
(OCF)
Bottom-Up Approach
OCF= [(P - VC) Q - FC - Dep] (1-Tax) + Dep
Tax-Shield Approach
OCF= (Sales - Costs) (1 - Tax) + (Dep x Tax)
Special Cases
Evaluate cost cutting proposal
Setting minimum bid price
Equivalent annual cost