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Final

FIN401 FINAL CRIBSHEET.pdf

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Department
Finance
Course Code
FIN 401
Professor
Melissa Toffanin

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CHAPTER 14 COST OF CAPITAL CHAPTER 16 CAPITAL STRUCTURE THE PECKINGORDER THEORY The mix of different securities issued by the firm to 1 Internal financing 2 Debt 3 Equity WEV financed w common equity finance operations This changes market value of the Consequences of Financial Distress EEMV of equity os shares x share price firm maximizing shareholders wealth 1 Business Failure 2 Legal bankruptcy 3 Technical WPV financed w preferred stocksThe COC varies directly with DE ratio Insolvency 4 Accounting Insolvency PPMV of preferred stock os shares x price DEGREE OF FINANCIAL LEVERAGE DFL LIQUIDATIONREORGANIZATION WDV financed w debtExtent in which a firm relies on debt higher Liquidationtermination of the firm as a going DDMV of Debt os bonds x bond price leveragehigher WACChigher debt concernReorganizationfinancial restructuring of VMV of firmEPDLeverage amplifies variation in both EPSROE a failing firm to attempt to continue operations COST OF EQUITY DFL change in EPS change in EBITCHAPTER 17DIVIDENDSDIVIDEND POLICY 1 Dividend Growth Model DFLEBITEBITInterest Cash Dividendmade quarterly RDPg where D D1g Breakeven EBIT Dividend YieldAnnual DivStock Pricemarket E101 0 2 CAPM or SMLRR ER R All Equity Firm unlevered EBIToldsharesEBIT pricePayout RatioAnnual DivEPSEPSEFEMFRisk PremiumER R Market ReturnRInterestnewsharesPlowback Ratio1Payout RatioMFMCOST OF DEBTYTMCost of Debt DebtEquity Firm levered EBITold interestold Stock Dividendnew shares of stock to SH as a COST OF PREFERRED SHARESRDPsharesEBITnew interestnewshares dividend instead of cash increaseof os sharesP0CALCULATING G Homemade Leverage HML The use of personal SpecialExtra Dividendsfirms with excess cash i Compound growth rate borrowing to alter the degree of financial leverage payout large dividendsex Last 5 dividends were 11 12 135 14 155 MM PROPOSITION I Stock Repurchaseoften used when firm has large 4USo 1101g155 when you solve g895 VEBITRVED amount of excess cash on handUELLLii Historical growth rate No TaxThe value of a levered firm is equal to the Dividend Payment ChronologyDoingchanges for years then find the average value of an unlevered firm VV Declaration Date board declares the dividendit ULiii gRetention ratio X ROECapital Structure is irrelevant WACC is the same no becomes a liability of the firm Project more risky than firm discount rateWACC matter how it is financedExDividend Date 2 business days before date of Project less risky than firm discount rateWACCWith TaxThe value of a levered firm is equal to the record if you buy stock ON or AFTER this date youRequired RateDiscount RateCost of Capital value of an unlevered firm plus the tax shieldwill NOT receive the dividend Stock price drops by U COC of levered firmRRRValue of Unlevered firm VEBIT 1TR amount of the dividendEDP UE COC of unlevered firmRValue of Levered firm VVTD Date of Record Holders of record determined E LUCFLOTATION COSTS costs of issuing new securitiesDebt financing is beneficial with an extreme Date of Payment Cheques are mailed CALC WEIGHTED AVERAGE FLOTATION COSTS scenario of 100 debt financing WACC decreases Dividends vs Dividend Policyf EV x fDV x fwith debt financingDividends MATTERvalue of stock is based on PV of A ED Let x needed to cover flotation costs MM PROPOSITION II expected future divs Higher divlower div Stock x 1fInitial Investment RRRR x DE Where RWACC price rise if divshare riseheld constantAEAADAxAmount needed to invest to cover flotation No TaxR is the cost of the firms business risk Dividend Policy may NOT matterIf firm reinvests ACHAPTER 22 LEASING ie required return on the firms assets now it growscan pay higher divs later 3 Types of Financial LeasesRR x DE is cost of the firms financial risk Homemade Dividendsform of investment income AD1 TaxorientedTrue LeaseTax LeaseRRRR x where asset or that com
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