# Study sets matching "cfa corporate finance"

Study sets

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Capital budgeting

Categories of capital projects

NPV

payback (discounted payback) period

Process of evaluating capital projects (projects with cash flo…

1. Replacement projects for maintaining the business or for co…

sum of the present values of a project's expected cash flows a…

the number of years required to recover the original cost of t…

Capital budgeting

Process of evaluating capital projects (projects with cash flo…

Categories of capital projects

1. Replacement projects for maintaining the business or for co…

Agency costs (dividends and share repos)

Cash vs stock mergers... Takeaways:... • Sto…

Clientele effect (Dividend policies)... ●…

Conglomerate mergers... Not so attractive…

Investors are worried that management may take on new projects…

*Cash offer: target shareholder's gains are capped at the amou…

*Different groups of investors prefer different dividend polic…

Least likely for mature growth and stabilised companies. In th…

Agency costs (dividends and share repos)

Investors are worried that management may take on new projects…

Cash vs stock mergers... Takeaways:... • Sto…

*Cash offer: target shareholder's gains are capped at the amou…

compute beta capital using debt to capi…

The unlevered beta is often referred to…

beta estimates are sensitive to

two methods to estimate the before-tax…

The unlevered beta is often referred to as the asset beta beca…

the method of estimation and data used.

the yield-to-maturity approach and debt-rating approach.

compute beta capital using debt to capi…

The unlevered beta is often referred to…

The unlevered beta is often referred to as the asset beta beca…

The typical steps in the capital budget…

Projects susceptible to capital budgeti…

The average accounting rate of return (…

The profitability index

1) generating ideas, 2) analyzing individual proposals, 3) pla…

1) replacement, 2) expansion, 3) new products and services, an…

The typical steps in the capital budget…

1) generating ideas, 2) analyzing individual proposals, 3) pla…

Projects susceptible to capital budgeti…

1) replacement, 2) expansion, 3) new products and services, an…

Topic level outcomes?

Reading 21 - Capital Budgeting

Reading 22 - Capital Structure

Reading 23 - Dividends and share repurc…

1. evaluate capital budget projects... 2. evaluate capital struct…

1. calculate cashflow during expansion and replacement of proj…

1. Modigliani-Miller propositions... 2. target capital structure…

1. impact on share value... 2. information conveyed... 3. clientele…

Topic level outcomes?

1. evaluate capital budget projects... 2. evaluate capital struct…

Reading 21 - Capital Budgeting

1. calculate cashflow during expansion and replacement of proj…

Calculate WACC

Calculate Cost of Debt (Kd) for WACC

Calculate Cost of Preferred Stock (Kp)…

Calculate Cost of Equity (Kce) for WACC

WACC= (Wd)(Kd)(1-t) + (Wp)(Kp) + (Wce)(Kce)... WACC - Weighted Av…

Kd is always after tax (Kd)(1-t)

Kp = D/P

1. CAPM: ... Kce = RFR + B(Rm- RFR) ... 2. DCF: ... Kce = (D0(1+g) /P0)…

Calculate WACC

WACC= (Wd)(Kd)(1-t) + (Wp)(Kp) + (Wce)(Kce)... WACC - Weighted Av…

Calculate Cost of Debt (Kd) for WACC

Kd is always after tax (Kd)(1-t)

Capital Budgeting process

Capital Budgeting Steps

Cap Budgeting Principals

Externalities

identifying and evaluating capital projects....projects where…

1) idea generation... 2) analyzing project proposals... 3) create th…

1) decisions based on cash flows, not accounting income... 2) Cas…

effects the acceptance of a project may have on other firm cas…

Capital Budgeting process

identifying and evaluating capital projects....projects where…

Capital Budgeting Steps

1) idea generation... 2) analyzing project proposals... 3) create th…

Capital Budgeting process

Capital Budgeting Steps

Capital budgeting projects can be class…

Capital budgeting concepts

The process that companies use for making long-term investment…

1) idea generation - most important... 2) analyzing individual pr…

-replacement projects - maintain normal business... -expansion pr…

Sunk costs - costs that cannot be recovered once they have bee…

Capital Budgeting process

The process that companies use for making long-term investment…

Capital Budgeting Steps

1) idea generation - most important... 2) analyzing individual pr…

Reorganization

Corporate Governance

Shareholders

Creditors

A firm with high financial leverage uses bankruptcy laws and p…

The system by which companies are directed and controlled

Provide funds and expect returns. Legal owners of the firm and…

Provide funds and expect repayment and interest. Dont have muc…

Reorganization

A firm with high financial leverage uses bankruptcy laws and p…

Corporate Governance

The system by which companies are directed and controlled

Operating Break even Quantity

Breakpoint

Business Risk

NPV

Fixed Operating Cost / (Price Per Unit/VC Per Unit)

amount of capital where component cost changes / weight of com…

demand variability, sales price variability, input price varia…

preferred criterion when ranking projects because it measures…

Operating Break even Quantity

Fixed Operating Cost / (Price Per Unit/VC Per Unit)

Breakpoint

amount of capital where component cost changes / weight of com…

Capital Budgeting process

Capital Budgeting Steps

Cap Budgeting Principals

Externalities

identifying and evaluating capital projects....projects where…

1) idea generation... 2) analyzing project proposals... 3) create th…

1) decisions based on cash flows, not accounting income... 2) Cas…

effects the acceptance of a project may have on other firm cas…

Capital Budgeting process

identifying and evaluating capital projects....projects where…

Capital Budgeting Steps

1) idea generation... 2) analyzing project proposals... 3) create th…

Capital Budgeting Expansion... (initial ou…

Capital Budgeting Expansion... (Op. Cash F…

Capital Budgeting Expansion... (TNOCF)

Capital Budgeting (replacement)

Initial outlay = FCInv + WCInv

CF = (S-C)(1-T) + DT

TNOCF = Sal + NWCInv - T(Sal - BV)

- Same as expansion, except current after-tax salvage of old a…

Capital Budgeting Expansion... (initial ou…

Initial outlay = FCInv + WCInv

Capital Budgeting Expansion... (Op. Cash F…

CF = (S-C)(1-T) + DT

Shareholders wealth includes two elemen…

Principles of capital budgeting... 五大原则

Profit index

MACRS-half year convention... Modified acc…

Capital gain=P1-P0... Dividend income=D1... Holding period yield=(…

1. NPV based on cash flow, not profit... 2. Based on incremental…

1.Assume the asset is placed in service in the middle of the f…

Shareholders wealth includes two elemen…

Capital gain=P1-P0... Dividend income=D1... Holding period yield=(…

Principles of capital budgeting... 五大原则

1. NPV based on cash flow, not profit... 2. Based on incremental…

Capital Budgeting Process (4 Steps)

Categories of Capital Budgeting Process…

Unconventional Cash Flows

5 Principles of Capital Budgeting

1. Generate Idea... 2. Analyze Projects... 3. Create Firm Budget... 4.…

1. Replacement to Maintain or Reduce Costs... 2. Expansion of cur…

More than one sign change

1. Cash Flow based, not accounting Income... 2. Opportunity cost…

Capital Budgeting Process (4 Steps)

1. Generate Idea... 2. Analyze Projects... 3. Create Firm Budget... 4.…

Categories of Capital Budgeting Process…

1. Replacement to Maintain or Reduce Costs... 2. Expansion of cur…

Capital Budgeting Process (4 Steps)

Categories of Capital Budgeting Process…

Unconventional Cash Flows

5 Principles of Capital Budgeting

1. Generate Idea... 2. Analyze Projects... 3. Create Firm Budget... 4.…

1. Replacement to Maintain or Reduce Costs... 2. Expansion of cur…

More than one sign change

1. Cash Flow based, not accounting Income... 2. Opportunity cost…

Capital Budgeting Process (4 Steps)

1. Generate Idea... 2. Analyze Projects... 3. Create Firm Budget... 4.…

Categories of Capital Budgeting Process…

1. Replacement to Maintain or Reduce Costs... 2. Expansion of cur…

What's the payback period

What's the discounted payback period

What's the average accounting rate of r…

What's the profitability index?

Time for undiscounted CFs to recover outlay.

Time for discounted CFs to recover initial outlay.

Average net income/Average book value

PV of future CFs/initial outlay

What's the payback period

Time for undiscounted CFs to recover outlay.

What's the discounted payback period

Time for discounted CFs to recover initial outlay.

Exam Focus

MM Capital Structure Irrelevance Propos…

2nd Proposition

Cost of Capital

This topic review explores various theories related to how a f…

In the MM no-tax world, the value of a company is not affected…

MM's second proposition with no taxes states that the cost of…

Exam Focus

This topic review explores various theories related to how a f…

MM Capital Structure Irrelevance Propos…

In the MM no-tax world, the value of a company is not affected…

Capital Budgeting

Typical capital budgeting steps (4)

5 key principles of capital budgeting

Independent projects

the process that companies use for decision making on long-ter…

1) Generate good investment ideas... 2) forecast CF for each proj…

1) Decisions are based on *incremental cash flows*... 2) Consider…

two projects do not depend on each other

Capital Budgeting

the process that companies use for decision making on long-ter…

Typical capital budgeting steps (4)

1) Generate good investment ideas... 2) forecast CF for each proj…

Exam Focus

Dividend irrelevance

Bird-in-hand argument for dividend poli…

Tax Aversion

The focus of the Level II exam is valuation, so pay close atte…

Merton Miller and Franco Modigliani (MM) maintain that dividen…

Myron Gordon and John Lintner, however, argue that rs decrease…

Under such a situation, according to the tax-aversion theory,…

Exam Focus

The focus of the Level II exam is valuation, so pay close atte…

Dividend irrelevance

Merton Miller and Franco Modigliani (MM) maintain that dividen…

Exam Focus

Capital Budgeting Process

Categories of Capital Budgeting Projects

Principles of Capital Budgeting

This topic review covers various methods for evaluating capita…

The capital budgeting process is the process of identifying an…

1. Replacement projects to maintain the business... 2. Replacemen…

1. decisions are based on cash flows, not accounting income... 2.…

Exam Focus

This topic review covers various methods for evaluating capita…

Capital Budgeting Process

The capital budgeting process is the process of identifying an…

Leverage

Business risk

Financial risk

Degree of operating leverage (DOL)

Amount of fixed costs a firm has ... 1. operating expenses... 2. fin…

Associated with operating income - uncertainty of revenue and…

additional risk taken on by equity shareholder's when a firm b…

Highest at low levels of sales... 1) %change in EBIT/%change in s…

Leverage

Amount of fixed costs a firm has ... 1. operating expenses... 2. fin…

Business risk

Associated with operating income - uncertainty of revenue and…

What is capital budgeting?

Why is capital budgeting important?

Steps of capital budgeting

Types of capital budgeting

Process of identifying and evaluating capital projects - any p…

1. Purchase of LT assets - determine future of co.... 2. Other co…

1. Idea generation ... 2. Analyse proposals by forecasting... 3. Cre…

1. replace to maintain... 2. replace to reduce cost... 3. expansion…

What is capital budgeting?

Process of identifying and evaluating capital projects - any p…

Why is capital budgeting important?

1. Purchase of LT assets - determine future of co.... 2. Other co…

Capital Budgeting Principal

Incremental Cash Flows

Initial Investment Outlay

After-Tax Operating CF

1. Decisions are based on incremental AFTER TAX cash flow.... - S…

Cash flows are evaluated in 3 stages... - Initial investment outl…

FCInv = cost of investment, getting it there... NWCInv = Change…

Add back depreciation tax shield because it is a non cash expe…

Capital Budgeting Principal

1. Decisions are based on incremental AFTER TAX cash flow.... - S…

Incremental Cash Flows

Cash flows are evaluated in 3 stages... - Initial investment outl…