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20 Cards in this Set
- Front
- Back
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Expansion projects- investment to increase business |
1. Initial cash outflow=FCInv + NWCInv 2. Annual operating cash flow= (sale-cash operating expenses)(1-tax rate)+ (tax rate * depreciation) 3.Terminal year non-OCF = Salvage + NWCInv - tax rate(Salvage - Book value) |
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Replacement projects-replacement of existing equipment with newer alternative |
1. Initial cash outflow= FCInv + NWCInv +(1- tax)*(Sal-Book) 2. Δ Annual OCF= (Δ S-Δ C)(1-t)+ Δ DT 3. Term. year non-OCF= Sal + NWCinv - t(Sal- B) |
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Static Trade-off Theory |
as debt rises there come a point where there benefit arising from the debt is offset by the costs of financial distress. There is a optimal d/e value |
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Economic Income |
= Cash Flow + Δ Market Value ΔMV= Ending balance - Beginning Balance or Economic Value= cash flow - economic depreciation |
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Accounting vs Economic income |
Accounting income is based on initial cost of the investment and reflects the decline in book value whereas the Economic value is focused on the market value of the investment |
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Modigliani-Miller |
Prop I: capital structure decision does not affect the company's market value -MM assumed no taxes and no cost of bankruptcy -value of levered firm= value of unlevered firm -Prop II: the cost of equity is linearly related to the firm's debt to equity ratio |
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Financial Distress Costs |
Higher operating or financial leverage leads to higher probability of financial distress Better corporate governance leads to lower probability |
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Agency Costs |
If firm uses more debt, it would reduce the net agency costs of equity |
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Costs of asymetric information |
-managers of firm have better information than outsiders -stock offering -> negative signal as it shows they believe their stock is overvalued (opposite for share repurchases) -debt offering-> positive signal with a confident future -Pecking order is internal funds> debt> equity |
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Dividend Irrelevance theory |
-NO effect on value -dividends can be homemade by selling a few shares for the cash you want |
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Bird-in-hand theory |
-evidence shows cost of equity decreases as payout ratio increases- investors are rewarding the firms for certainty of near term dividends with a lower level of risk -higher dividend payout policy will be rewarded |
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Tax Aversion theory |
-Investors in high tax brackets prefer not to receive dividends -low payout is rewarded -US Div's and LT cap gains are both 15% |
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Herfindahl-Hirschman Index (HHI) |
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Effective tax rate under double taxation |
= corporate tax rate + (1 - corporate tax rate)(individual tax rate) |
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Split-Rate system of taxation |
Under split-rate system, effective tax rate is computed the same way as double taxation but we use the corporate tax rate for distributed income as the relevant corporate tax rate in the double taxation formula. |
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Tax imputation system |
all taxes are paid at the shareholder's marginal tax rate |
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Corp Governance best practices |
global best practice calls for 75% of board members to be independent, board members do not serve on more than 2-3 boards total, and that all directors are elected annually. |
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Calculating new cost of equity with new D/E ratio |
re=r0+[(r0-rd) * (1-t) * (D/E)] |
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HHI calculation |
Pre=(market sharea)^2 + (marketshareb)^2+......+(marketsharez)^2 Post=(combined marketshare of new company)^2+(marketshareb)^2 + ....+(marketsharez)^2 |
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Economic Profi |
=NOPAT - $WACC |
