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ADVANCED CORPORATE FINANCE (Fatin Syahira & Nurul Nisa) (CHAP 5:…
ADVANCED CORPORATE FINANCE (Fatin Syahira & Nurul Nisa)
CHAP 1: INTRODUCTION TO FINANCE
Definition - A process involved in an attempt to obtain and allocate financial resources effectively to achieve the co's objectives.
📝 Objectives of a firm:
🔎 Primary and secondary objectives
🔎 Financial and non financial objectives
🔎 Profit maximization
🤔 3 Main Areas
💰Capital budgeting
💰Capital structure
💰Assets management
Corporate Governance
- The system of rules, practices and processes by which a company is directed and controlled.
Agency Theory
- Explain elements to organizational behavior through and understanding the relationship between the principals (shareholders) and the agents (firm managers).
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 and ownership of the firm.
CHAP 2: RAISING CAPITAL
Venture Capital
- Money provided by investors to startup firms and small businesses with perceived long term growth potential.
❓How to choose a Venture Capitalist:
❗️Financial strength
❗️Style
❗️References
❗️Contacts
❗️Exit strategy
Equity Capital
- It can be cash offer (IPO and SEO) and Right Offer.
IPO (Initial Public Offering)
- A company's first equity issue made available to the public.
SEO (Seasonal Equity Offering)
- A new equity issue of securities by a company that has previously issued securities to the public.
Rights Offer
- Issue of common stock offered to existing shareholders at a subscription price within a subscription period.
"Rights" are given to the shareholders:
✅Specify purchase price.
✅Specify time frame.
✅Specify number of shares that can be purchased.
CHAP 5: PROJECT ANALYSIS & EVALUATION
🔥
Forecasting Risk (estimation risk)
- The possibility that errors in projected cash flows will lead to incorrect decisions.
🔥
Scenario Analysis
- The determination of what happens to NPV estimates when we ask what if questions.
💣Base case scenario
💣Best case scenario
💣Worst case scenario
🔥
Sensitivity Analysis
A variation on scenario analysis that is useful in pinpointing the areas where forecasting risk is especially severe.
The basic idea with a sensitivity analysis is to freeze all of variables except one.
🔥
Break-even Analysis
- A popular and commonly used tool for analyzing the relationship between sales volume and profitability.
💴Cash break-even
💶Accounting break-even
💵Financial break-even
🔥
Degree of operating leverage (DOL)
- The degree to which a project or firm relies on fixed cost.
🔥
Capital Rationing
😇Soft rationing
🏢Business allocated certain amount
😡Hard rationing
🏢Business cannot raise financing
CHAP 3: CAPITAL STRUCTURE
🤯Financial Leverage and Capital Restructuring🤯
🗣M&M Proposition I and II (with ✅ tax)
M&M I
Value of firm ⬆️ as the total debt ⬆️ because interest tax shield and WACC ⬇️
M&M II
The firm's cost of equity ⬆️ as the firm relies more on debt financing
🗣M&M Proposition I and II (without 🚫 tax)
M&M II
The firm's cost of equity capital is positive linear function of firm's capital structure and the WACC are NOT 🙅🏻♀️ affected
M&M I (Pie Model)
The value of firm is independent of firm's capital structure where there is NO 🙅🏻♀️ effect on WACC
😰Financial Distress😭
⛔️Cost of Financial Distress
Depend on the probability of distress and the magnitude of costs encountered if the distress occurs
⛔️Financial Distress
Occurs when promises to creditors are broken or honored with difficulty and will lead to bankruptcy.
🧐Types of Cost of Bankruptcy
☝🏻Direct: Cost that directly associated with bankruptcy such as legal and administrative expenses
✌🏻Indirect: Cost of avoiding a bankruptcy that incurred by a financially distressed firm
Trade Off Theory: capital structure based on trade off between tax savings and distress costs of debt
Pecking Order Theory: Firms prefer to issue debt over equity if internal finances are insufficient
📝Asymmetric information: affects the choice between internal and external financing, and between issues of debt and equity securities
📝New equity issues: last resort when the company runs out of debt capacity
📝Implications of Pecking Order
💸Firm prefer internal finance
💸Internal equity is better than external equity
💸Financial slack is valuable
💸If external capital is required, debt is better
Factors Affecting Capital Structure‼️
⚠️Size: Large firm tend to have HIGH debt ratio
⚠️Tangible Assets: Firms with HIGH ratio of fixed assets to total assets have HIGH debt ratios.
⚠️Profitability: More profitable firm have LOW debt ratios
⚠️Market to Book: firm with HIGH ratios of market-to-book value have LOW debt ratios
CHAP 4: CASH FLOW DETERMINATION
👉🏻Relevant Cash Flows: A change in the firm overall future cash flow that comes about as a direct consequence of the decision to take that project
👉🏻Incremental Cash Flows: The difference between a firm's future cash flows with a project or without the project
🔘Side Effects
🔘Net Working Capital
🔘Opportunity Costs
🔘Financing Costs
🔘Sunk Costs
🤫Special Cases✍🏻
⏩Evaluating Cost Cutting Proposal (NPV)
⏩Setting Minimum Bid Price (NPV = 0)
⏩Equivalent Annual Cost with different useful life (EAC)
👨🏻💻Operating Cash Flows (OCF)🏦
✨Bottom Up Approach
✨Tax Shield Approach
CHAP 6: EFFICIENT MARKETS AND BEHAVIORAL FINANCE
🏦Random Walk Theory: Past movement of stock prices cannot be used to predict future movement. The movement of stock price is random
🏦Efficient Market Theory: refers to the degree which market prices reflect all available, relevant information
✍🏻6 Lessons of Market Efficiency
🙇🏻♀️Market Have No Memory
🙇🏻♀️Trust Market Prices
🙇🏻♀️Read The Entrails
🙇🏻♀️Do-It-Yourself Alternative
🙇🏻♀️Seen One Stock, Seen Them All
🙇🏻♀️There Are No Financial Illusions
💼3 Forms of Market Efficiency
🤙🏻Semi-Strong Form
💪🏻Strong Form
👎🏻Weak Form
CHAP 7: PAYOUT POLICY
⁉️How Firms Pay Dividends
💢Ex-Dividend Date
💢Record Date
💢Declaration Date
💢Payment Date
🤑Dividend
🤔Types of Dividends
🖊Extra Dividends
🖊Special Dividends
🖊Regular Cash Dividends
🖊Liquidating Dividends
🤑Dividends Paying Methods
👩🏻💻
Stable
: Companies consistently pay a div each year regardless of earnings fluctuations
👩🏻💻
Hybrid:
to establish a set of div which represents a relatively small portion of yearly income
👩🏻💻
Residual:
Allows a company to use their retained earnings/ residual income to invest back into the company
Terms⁉️
🌐
Stock Splits
: essentially 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 Dividends:
a payment made by a firm to its owner in the form of stock, diluting the value of each share outstanding
🌐
Stock Repurchase:
transaction where a company buyback its own shares on the market place
CHAP 8: MERGERS AND ACQUISITION
😱
Merger
- One firm is acquired by another.
👍🏻Advantage - legally simple
👎🏻Disadvantage - must be approved by stockholders of both firms.
🤕
Acquisition
- A firm can be acquired by another firm or individual purchasing voting shares of the firm's stock.
Classifications of Acquisition
👀Horizontal
👀Vertical
👀Conglomerate
😏
Defensive Tactics
💊Poison Pill
💣Leverage buyout
🔮Golden parachute
👑Crown jewel
☁️White knight
🤧Stock Acquisition
📈Tender offer - public offer to buy shares
📃No stockholder vote required
📨Deal directly with stockholders, even if management is unfriendly
🗞May be delayed if target shareholders hold out for more money
😩
Asset Acquisition
- buying most or all of its assets, the company not necessary will stops to exist, it just sold off its asset.