Samenvatting Corporate Finance, Global Edition

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ISBN-10 0273792067 ISBN-13 9780273792062
189 Flashcards en notities
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Dit is de samenvatting van het boek "Corporate Finance, Global Edition". De auteur(s) van het boek is/zijn Jonathan Berk Peter DeMarzo. Het ISBN van dit boek is 9780273792062 of 0273792067. Deze samenvatting is geschreven door studenten die effectief studeren met de studietool van Study Smart With Chris.

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Samenvatting - Corporate Finance, Global Edition

  • 1.1 Maart 2015

  • Assume perfect capital markets without taxes. One way to calculate whether a firm should use debt or equity to finance a project is to see which type of financing leads to the lowest WACC.
    False
  • Risk shifting refers to the concept that managers, who perceive the firm’s equity to be underpriced, prefer to fund investments with retained earnings, or debt, rather than equity.
    False
  • Holding cash has the opposite effect on risk and return of equity claims than leverage.
    Tue
  • In perfect capital markets, as there are no corporate taxes, we can strictly rank the different costs of capital of a firm with leverage according to the following order: Rd<Rwacc<Ra<Re
    False
  • A board of directors is said to be captured if the CEO also serves as chairman of the board
    False
  • Since depreciation is not a cash expense, it does not affect operating cash flows.
    False
  • b. When making investment decisions, a company should include opportunity costs of required resources.
    True
  • Since sunk costs have already been realized, a company should include them when making their investment decision.
    False
  • In which direction will a company’s (after-tax) WACC rate change when it sells off a business unit with lower systematic risk and uses all proceeds to retire debt?
    The WACC rate increases
  • Using the WACC method, the value of a project is based on free cash flows, which ignore interest and debt payments.
    True
  • The Flow-to-Equity (FTE) method is based on free cash flows to equity holders, which takes all payments from and to debt holders into account.
    True
  • The FTE Method uses the weighted average cost of capital to discount cash flows to equity holders.
    False
  • Implementing the APV method with a constant debt-equity ratio is complicated because it requires simultaneous solving for a projects debt and total value.
    True
  • Personal taxes have the potential to offset some of the corporate tax benefits of leverage if interest income is taxed at a higher rate than dividends or capital gains.
    True
  • If capital gains are taxed at a higher rate than dividends, which has been true until the most recent change to the tax code in the US, shareholders will prefer share repurchases over dividends.
    False
  • Shareholders typically must pay taxes on the dividends they receive. Likewise, they must also pay capital gains taxes when they sell their shares.
    True
  • Because long-term investors defer capital gains tax until they sell their shares, there remains effectively a tax advantage for share repurchases over dividends even if dividends and capital gains are taxed at the same rate
    True
  • Which of the following actions cannot be directly initiated by shareholders of a publicly traded company
    Remove an incumbent management team
  • Transcontinental Inc. has a value of $500M if it continues to operate, but has outstanding debt of $600M. If Transcontinental declares bankruptcy, bankruptcy costs will equal $50M, and the remaining $450M will go to creditors. Instead of declaring bankruptcy, Transcontinental proposes to exchange the firm’s debt for a fraction of its equity in a workout. What would be the minimum fraction of the firm’s equity that Transcontinental needs to offer its creditors for the workout to be successful?
    90%
  • V+U Corporation has no debt on its balance sheet, but paid $500M in taxes last year. To decrease the tax burden, management decides to issue $600M in debt at a rate of 8%. Assume that V+U’s marginal corporate tax rate is 35%. Furthermore, V+U’s investors pay a 25% tax rate on income from equity and 35% tax rate on interest income. If the company maintains this level of debt in perpetuity, what is the present value of the created tax shield?
    150M
  • Consider an all-equity firm that is run by a manager who acts in the best interest of existing shareholders. The value of the firm’s assets in place is either $225M or $200M. The firm has an investment project that requires an investment of $33.75M. The only way to finance this project is by issuing equity to new investors in a competitive stock market. The project generates a certain, risk-free cash flow of $50M next year (i.e. this cash flow does not depend on the value of assets in place). Everyone is risk neutral and there is no discounting. Suppose there is asymmetric information, i.e. the manager knows the true value of assets in place, while investors believe assets to have a value of $225M with 80% probability and a value of $200M with 20% probability. Which of the following statements holds?
    Both types of firms will issue equity and undertake the project.
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Voorbeelden van vragen in deze samenvatting

Assume perfect capital markets without taxes. One way to calculate whether a firm should use debt or equity to finance a project is to see which type of financing leads to the lowest WACC.
1
Risk shifting refers to the concept that managers, who perceive the firm’s equity to be underpriced, prefer to fund investments with retained earnings, or debt, rather than equity.
1
Holding cash has the opposite effect on risk and return of equity claims than leverage.
1
In perfect capital markets, as there are no corporate taxes, we can strictly rank the different costs of capital of a firm with leverage according to the following order: Rd<Rwacc<Ra<Re
1
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