Corp Finance Essay

1212 Words Jan 3rd, 2012 5 Pages
* PV(CF) = CF/(1+r)t AKA PV = FV/(1+r)t * NPV = PV(CFs) – Investment = -C0 +C1/(1+r)+C2/(1+r)2+C3/(1+r)3+… = ∑(Expected CFt)/(1+r)t – Investment * Perpetuity – pays a fixed amount C per period forever * P(C,r) = C/r requires cash flow to begin NEXT period. If begin now, then PV = C + C/r * Annuity – fixed stream of cash flows that has a final period t * A(C,r,t) = C/r [1-1/(1+r)t] * Growing Perpetuity – G(C,r,g) = C/(r-g) C is initial cash flow, r is discount rate, g is growth rate * P/E = 1/(r-g) * High P-E multiple means the firm has good growth opportunities (high g), investments have low risk (low r), or both * Computing NPV – obtain the proper CF to use in the calculation * …show more content…
If little chance of default then βD = 0 and βA = βE E/(D+E) * Use the risk measure associated with the project you are investing in – not necessarily the risk measure for your firm * VL = VU + PV (Tax Benefits) + Corporate Benefits (Debt) – Costs of Financial Distress * VL is the value of the firm with leverage, VU is the value of the all-equity firm * 2 methods used to incorporate tax benefits to previous valuation techniques: APV & WACC * APV (Adjusted Present Value – adjusts for tax by increasing the cash flows due to the tax benefit * Increase each annual CF by Debt capacity * Debt Rate * Corporate Tax Rate = ITS (Interest Tax Shield) * Step: Plug into CAPM to get Discount Rate Ra = Treasury + 6*Asset Beta if current * WACC (Weighted Average Cost of Capital) – adjusts for taxes by decreasing the discount rate * WACC = r* = rd (1-tc) [D/(D+E)] + rE [E/(D+E)] done on a Market Value basis (D can be book value but not E) * Steps: (1) Relever Asset Beta to Equity Beta: Asset Beta / Proposed Equity Ratio, (2) Plug into CAPM to get Equity Discount Rate, (3) WACC = %Eq*Re + %D*Rd*(1-Tc) * Pstock = Equity Value / #Shares Outstanding = (Enterprise value + Cash – Debt) / # Shares Outstanding * Two primary methods to calculate value: Multiples-Based Method

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