Samenvatting Corporate Finance, Global Edition

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.
  • 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.
  • Holding cash has the opposite effect on risk and return of equity claims than leverage.
  • 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
  • A board of directors is said to be captured if the CEO also serves as chairman of the board
  • Since depreciation is not a cash expense, it does not affect operating cash flows.
  • b. When making investment decisions, a company should include opportunity costs of required resources.
  • Since sunk costs have already been realized, a company should include them when making their investment decision.
  • 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.
  • 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.
  • The FTE Method uses the weighted average cost of capital to discount cash flows to equity holders.
  • Implementing the APV method with a constant debt-equity ratio is complicated because it requires simultaneous solving for a projects debt and total value.
  • 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.
  • 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.
  • Shareholders typically must pay taxes on the dividends they receive. Likewise, they must also pay capital gains taxes when they sell their shares.
  • 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
  • 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?
  • 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?
  • 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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Laatst toegevoegde flashcards

Consider a penniless, risk neutral entrepreneur who has a project that requires an investment $70 million at date 0. At date  1, the project generates cashflows of either $200million or $32 million. The probability of success depends on the entrepreneur’s effort choice. If the entrepreneur chooses“high effort”, the project succeeds with probability 75%. If the entrepreneur shirks,the project succeeds only with a 25% probability. Exerting “higheffort” is costly for the entrepreneur. Denote by the monetary equivalent of this cost. Investors cannot observe the entrepreneur’schoice of effort. Suppose the entrepreneur intends to finance the investment by getting a loan from a risk‐neutral bank. What is the maximum cost of effort that is compatible with the entrepreneur choosing higheffort? (Hint: Compute at first the minimum facevalue of debt needed to raise $70 millions if the bank assumes that the entrepreneur will put effort into the project.)

Bruce United is considering a new project. The risk of this project is similar to that of companies having a 11% unlevered cost of capital. Bruce United plans to finance the new division with 60% debt financing and intends to maintain this debt‐to‐value ratio  constant. The firm faces a borrowing rate of 5% and a corporate tax rate of 50%. Estimate the weighted average cost of capital for the project.
Consider an all‐equity company that operates in a perfect capital market and generates a free cash flow of $2 million year after year in perpetuity. The required rate of return of its equity holders is 10%. The company currently paysout all free cash flows as dividends every year. Suppose there are 100,000 shares outstanding. Suddenly, on the day before the stock would  trade ex‐dividend, the company decides to change its payout policy. Instead of the usual $2 million, it will pay a one‐time special dividend of aggregate $4.2 million. The company has no excess cash and raises additional funds needed for the special dividend by issuing equity in a competitive market  (just before the shares trade ex‐dividend–note that the one‐time special  dividend is paid to existing investors as well as to investors who buy the newly issueds hares). New equity investors require the same rate of return as existing shareholders of 10%. What will be the stockprice  after the stock trades ex‐special dividend?
The stockprice equals $181.8.
Which of the following take over defenses has proven to increase the probability that a take  over attempt will be successful?
The EV/sales ratio is a valuation multiple that is less susceptible to be affected by accounting practices.
It is difficult to value firms  onEV/EBIT multiples if their EBIT is negative.
Price/Earnings ratios are a useful valuation multiple because they allow a comparison of firms with different capital structures.
A down side of EV/EBITDA multiples is that firms with high capital intensity appear relatively undervalued in comparison to firms with low capital  intensity.
By repurchasing equity and replacing it with debt, the expected earnings per share will increase. The share price will remain unchanged.
Borrowing a moderate amount of debt has no significant influence on the probability of financial distress. Borrowing moderate amounts will therefore not lead to an increase in the required rate of return of shareholders.