AFM373 Study Guide - Winter 2018, Comprehensive Midterm Notes - Net Present Value, Capital Structure, Weighted Average Cost Of Capital
12 Oct 2018
School
Department
Course
Professor
AFM373
MIDTERM EXAM
STUDY GUIDE
Fall 2018
What is corporate finance
Looking at different stakeholders
Maximum shareholder value
The actual business to create value (Investment)
Finance - where to get the money to finance investments
Market Value B/S
Looking at the PVs of projects (series of cash flows) and working out if they add value.
oThis is the left hand side (Investment decisions)
The finance decisions is the right side
oDebt vs. Equity
rD (cost of debt for the company)
rE (cost of equity for the company) more risk than debt (Debts are paid
first) so require a higher return
oCapM formula to determine return of equity
Risk free rate + beta* (Market risk - Risk free rate)
rWACC is used as the discount rate for projects
Smaller the rWACC, the better it is because you get higher NPV.
Ben and Jerry’s case
Who are we?
Henry Morgan- retried dean. He is an non-executive director.
oRole is to help advise the company and represent the interest of other
shareholders (the public shareholders, not Ben & Jerry)
Why are we here?
different take over bids
Alternatives:
Accept A, B, C, D, & Reject all 4
Negotiate
Criteria:
Risk vs returns
Product vs. economic vs. social
Keep management or not
Analysis
Why has Ben and Jerry’s been a takeover target?
find more resources at oneclass.com
find more resources at oneclass.com
Because they've been underperforming when the people trying to take over can
make more of this company if they take over it.
What determines/drives corporate policy at this company. What is their mission?
Product, Economic, and Social
Who controls Ben and Jerry? In whose interest?
The cofounders of B&J owns most of class B which is 10 for 1 shares. They keeping control
on the inside while still selling shares to the outsiders.
They could be making more if most of the ownership is from outsiders
A "staggered" board can only replace the third of the board each year and keep their
powers longer
What is market capitalization?
Market cap = number of shares x share price (how much it costs to buy the firm)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
The actual business to create value (investment) Finance - where to get the money to finance investments. Looking at the pvs of projects (series of cash flows) and working out if they add value. o. This is the left hand side (investment decisions) Risk free rate + beta* (market risk - risk free rate) rwacc is used as the discount rate for projects. Smaller the rwacc, the better it is because you get higher npv. He is an non-executive director: role is to help advise the company and represent the interest of other shareholders (the public shareholders, not ben & jerry) Accept a, b, c, d, & reject all 4. Because they"ve been underperforming when the people trying to take over can make more of this company if they take over it. The cofounders of b&j owns most of class b which is 10 for 1 shares. They keeping control on the inside while still selling shares to the outsiders.
