Cfa Level 2: Corporate Finance

Front 1

DIVIDEND AND SHARE REPURCHASES
-Stable Dividend Policy
-Constant Dividend Policy
-Residual Dividend Policy

Back 1

Stable Dividend Policy - increasing the dividend at a reasonable steady rate
Constant Dividend Policy - applies a target dividend payout ratio to current earnings making earnings more volatile
Residual Dividend Policy - the dividend paid out is equal to the earnings achieved for that year less the retained earnings required for the financing of the company's optimal capital budget (1. determine capital budget, 2. amount of equity needed to finance that budget, 3. use retained earnings to meet equity requirements, 4. pay out dividend on excess of capital budget)

Front 2

DIVIDEND AND SHARE REPURCHASES
Target Repayment Ratio

Back 2

Div1-Div0 = target change = (target ratio * EPS1 - Div0)
or
Div1 = Div0 + Adjustment Factor (Target Payout Ratio*EPS1-Div0)

Growth in EPS * Adjustment Factor*Target Payout + Last Dividend

Front 3

DIVIDEND AND SHARE REPURCHASES
Marginal Tax Rate on Dividend Income Formula

Back 3

Difference in stock price before and after the dividend is if you own the stock and paid capital gains and paid dividend tax

Front 4

CAPITAL STRUCTURE
WACC Calculation

Back 4

WACC is the marginal cost of raising additional capital affected by the cost of capital and proportion of each capital

Front 5

CAPITAL STRUCTURE
Modigliani and Merton Theory

Back 5

Front 6

CAPITAL STRUCTURE
Modigliani and Merton Theory
Proposition I vs Proposition II

Back 6

Proposition I
- Capital structure is irrelevant because cost of debt/equity is inverse
- If taxes exist, firm value is maximized at 100% debt

Proposition II
-Capital structure is irrelevant, adding more debt will increase the cost of equity
-If there are taxes, WACC is minimized at 100% debt

Front 7

CAPITAL STRUCTURE
Cash Flow After Taxes (CFAT)

Back 7

Cash Flow After Tax = Net Income + Depreciation + Amortization + Other Non Cash Charges - Cash Charges

Front 8

CAPITAL STRUCTURE
After-Tax Operating Cash Flow

Back 8

Sales - Cash Operating Expense - Depreciation * (1 - Tax Rate) + Depreciation

Front 9

CAPITAL STRUCTURE
Initial Investment Outlay

Back 9

FCInv = investment in new fixed capital
NWCInv = investment in net working capital
Initial Outlay = FCInv + NWCInv

CF=(S-C-D)(1-T)+D = (S-C)(1-T)+DT
TNOCF = Sal + NWCInv - T(Sal-B

Front 10

CAPITAL STRUCTURE
Comparing PV Differences with Depreciation Methods

Back 10

1) Calculate the PV of each depreciation method
2) Take the differences
3) Apply taxes on the difference to calculate actual saving

Front 11

CAPITAL STRUCTURE
-Economic Income
-Economic Depreciation

Back 11

Economic Income = AT CF + (delta) project's MV
*Calculated before Interest Income

Economic Dep. = (delta) investment's MV

Front 12

VALUATION MODELS
Economic Profit

Back 12

Econ. Profit = NOPAT - $WACC; discounted at WACC

Front 13

VALUATION MODEL
Residual Income

Back 13

Residual Income = Net Income - Equity Charge

Front 14

DIVIDEND AND SHARE REPURCHASES
Dividend Coverage Ratio

Back 14

Dividend Coverage Ratio = Net Income/Dividends

Front 15

DIVIDEND AND SHARE REPURCHASES
FCFE Coverage Ratio

Back 15

FCFE Coverage Ratio = FCFE / (Dividends + Share Repurchases)

Front 16

MERGERS AND ACQUISITIONS
Herfindahl-Hirschman Index (HHI)

Back 16

HHI = mkt. power = sum of squared mkt. shares

Front 17

MERGERS AND ACQUISITIONS
Combined Firm Valuation

Back 17

V(A+T)=V(A)+V(T)+S-C

Front 18

MERGERS AND ACQUISITIONS
Takeover Premium

Back 18

Takeover Premium (to target):
Gain (T) = TP = P(T) - V(T)

Front 19

MERGERS AND ACQUISITIONS
Synergies

Back 19

Gain (A) = S - TP = S - (P(T) - V(T))