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FIN401- Cheat sheet 1st midterm.docx

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FIN 401
Scott Anderson

CHAPTER 1- INTRO TO CORPORATE FINANCE The Financial Manager Management decisions Business organizations CHAPTER 9- NPV  Make decisions Behalf of the stockholders  Capital budgeting decisions  Legal forms- life, obtaining, how to tax IRR rules What LT investments should be made Mix of LT debt and equity to finance  Sole proprietorship, Partnership,  IRR > R accept Raise funds to finance investments  Working capital decision corporation  IRR = R  indifferent Manage ST assets and liabilities Manage cash flows by adjustments  Goals: max current price  IRR < R  Reject Agency Problem  Problem— makes decisions to benefit  Cash flows to and from the firm Profitability Index (PI):  Principal agent relationship own benefit not for principles Issue securities and sell to market Exceeds 1.0, the project’s Between SH and managers  Managing participants NPV exceeds zero Principle: hires to make decisions on Create incentive contracts  Primary and secondary markets investments desirable behalf Monitor management activity Primary: original sales PI= PV (inflows)/ PV Agent: person hired to make decisions Costs associated= agency costs Secondary: subsequent sale and (outflows) purchase CHAPTER 9 NPV > 0 accept project NVP < 0 reject project Payback rule—management sets max time for payback (set I% to 0) Discounted payback—(set I% to r) CHAPTER 14- COST OF CAPITAL CHAPTER 10- CAPITAL BUDGETING Cost of equity WACC Flotation Costs LIST Dividend growth model: P 0 D /1 -E Weights: E/V D/V P/V Paid to an underwriter agency 1: (project)+ PVCATTS- (NWC) D = D (1+g) WACC= W (R (1-T )+W (R )+(W )(R ) F = e/v(f )+d/v(f ) 2: AT CF 1 0 D D C E E P P a e d Security market line: E =RF+Β ER MR )F IRR > WACC  accept LISTS Last: AT CF+ Salvage+ NWC Cost of debt and preferred stock 1: Project cost w/ flotation costs R DCalculator) -(project cost/(a-f ) R = D/P Everything else the same I%: WACC P 0 CHAPTER 16- CAPITAL STRUCTURE ROE =uEBIT)(1-T)/ SHE Homemade leverage M&M prop I- value of the firm Capital structure: mix if different securities issued by ROE =L(EBIT-I)(1-T)/ SHE Action Process No tax—V =VL U the firm to finance its operations. Altering this can Shares repurchased= D/ PPS Tax—V = V +T D change the cost of capital/ market value of the firm= Levered Borrow R ,Dbuy shares L U C Shares outstanding= E/PPS M&M prop II- Cost of equity max SH wealth Share price= CF/r/#of shares Unlevered Lend at R D Sell shares No tax—R =E +(A -R A(D/D) Financial leverage: extent in which a firm relies on CF= EBIT(1-T) Tax— R =E +(A -R A(DDE)(1-T) debt V u(EBIT)(1-T)/R EU Investors will do the opposite of firms cap Higher leverage=higher WACC= higher debt restructure action to achieve desired CF V L(EBIT)(1-T)/WACC R ED/E goes in same direction Degree of financial leverage (DFL) = EBIT/EBIT-I IEXD(R )E UL L Bankruptcy theory: V LV +U D-Cx B.C Static theory: additional debt to offset increase Tax benefitRD) CFD 0 D(I) Ex B.C= prob bankrupt (PV of bankrupt) likelihood of financial distress R = EBIT-I=EBT-T=NI Types: liquation, re-organization  Optimal D/E where WACC is min so V is max D CFE EBIT(1-T) EBIT-I(1-T) ROE=NI/E V EBIT(1-T)/R U V uT C Pecking order theory: Trusts: operating as a trust rather than a corporation EPS=NI/shares V S/E Total V
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