copfineverything

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copfineverything

  1. 1. Corporate Finance Everything….. R Srinivasan
  2. 2. Corporate Finance <ul><li>Valuation and Cost of capital </li></ul><ul><li>Capital budgeting </li></ul><ul><li>Capital structure, financing and dividend policy </li></ul><ul><li>Working capital </li></ul>
  3. 3. Valuation <ul><li>Generalised valuation </li></ul><ul><li>Arbitrage and value additivity </li></ul><ul><li>Patterns </li></ul><ul><li>Level perpetuity </li></ul><ul><li>Growing perpetuity </li></ul><ul><li>Level annuity </li></ul><ul><li>Growing finite cash flow </li></ul>
  4. 4. Valuation <ul><li>Growing finite [t years] cash flow </li></ul><ul><li>C 1 /(r-g){1-(1+g) t /(1+r) t } </li></ul>
  5. 5. Valuation <ul><li>Compounding intervals (1+r/m) m -1 </li></ul><ul><li>Continuous compounding </li></ul><ul><li>Stated and effective rates </li></ul><ul><li>Nominal and real rates </li></ul><ul><li>1+r nominal =(1+r real )(1+inflation rate) </li></ul>
  6. 6. Valuation: Straight Bonds <ul><li>YTM </li></ul><ul><li>Duration </li></ul><ul><li>Sensitivity of value to changes in interest rates </li></ul><ul><li>[1*PV(C1)/V]+[2*PV(C2)/V]+[3*PV(C3)/V] </li></ul><ul><li> V/V =  (1+r)/(1+r)*D </li></ul>
  7. 7. Valuation: Common Stock <ul><li>Perpetual growth models </li></ul><ul><li>Sustainable growth </li></ul><ul><li>P 0 =No-Growth +PVGO </li></ul><ul><li>No-growth =EPS 1 /r </li></ul><ul><li>PVGO=NPV 1 /(r-g) </li></ul><ul><li>where NPV 1 =-INV 1 +INV 1 *ROE/r </li></ul><ul><li>g=Ploughback*ROE </li></ul><ul><li>EPS 1 /P 0 interpretation </li></ul>
  8. 8. Valuation <ul><li>Multiple stages </li></ul><ul><li>Supernormal stage plus PV of normal growth </li></ul><ul><li>Free cash flow </li></ul><ul><li>NOI approach </li></ul>
  9. 9. Cost of Capital <ul><li>Security return and standard deviation </li></ul><ul><li>Portfolio return and standard deviation </li></ul><ul><li>Diversification Portfolio variance= </li></ul><ul><li>1/N Average Var+(N-1)/N Average covariance </li></ul><ul><li>Systematic and unsystematic risk </li></ul><ul><li>CAPM </li></ul><ul><li>Opportunity cost of capital r [r A ]and </li></ul><ul><li>Adjusted cost of capital r* </li></ul>
  10. 10. Cost of Capital <ul><li>1. V L = V U +T c *D </li></ul><ul><li>2. WACC = D/V * (1-T c ) * r D +E/V * r E [Definition of WACC] </li></ul><ul><li>3. r E = r A + (r A - r D ) * (1- T c ) * D/E [MM Proposition II] </li></ul><ul><li>4.  E = {1+ (1- T c ) * D/E} *  A [If debt is risk free] </li></ul><ul><li>5. r E = r f + (r M - r f ) *  E [CAPM] </li></ul><ul><li>6. WACC= r A *(1- T c * D/V) MM </li></ul>
  11. 11. Valuation <ul><li>Contingent cash flow </li></ul><ul><li>Call/Put </li></ul><ul><li>American/European </li></ul><ul><li>Binomial </li></ul><ul><li>Black-Scholes </li></ul><ul><li>Underlying asset price, Exercise Price, Risk-free rate, Volatility, Time </li></ul>
  12. 12. Capital Budgeting <ul><li>NPV and IRR not payback and accounting rate of return </li></ul><ul><li>Accept/reject single project use NPV or IRR, unless no/multiple IRR </li></ul><ul><li>Mutually exclusive projects: Same life and risk </li></ul><ul><li>Use NPV [or IRR of difference between projects] </li></ul>
  13. 13. Capital Budgeting <ul><li>Mutually exclusive projects: Different lives same risk </li></ul><ul><li>Use NPV-assumes replacement projects have zero NPV. OK for projects with long lives </li></ul><ul><li>Use NPV-with specific replacements that make project with comparable lives </li></ul><ul><li>Use replacement chain or EAC </li></ul><ul><li>Care: Use only real cash flows for EAC </li></ul>
  14. 14. Capital Budgeting <ul><li>Incremental nominal cash flows with empirically measured discount rate </li></ul><ul><li>Components of cash flow </li></ul><ul><li>Investment in fixed assets, salvage value </li></ul><ul><li>Investment in working capital, release </li></ul><ul><li>Operating revenues/expenses </li></ul><ul><li>NO INTEREST </li></ul>
  15. 15. Capital Budgeting <ul><li>NPV assumes “now or never” </li></ul><ul><li>Real Option framework </li></ul><ul><li>Abandonment </li></ul><ul><li>Follow-up </li></ul><ul><li>Wait and learn </li></ul><ul><li>Flexibility </li></ul>
  16. 16. Capital structure <ul><li>Market Efficiency </li></ul><ul><li>MM-1 No taxes </li></ul><ul><li>MM-2 Corporate taxes </li></ul><ul><li>Miller Both corporate and personal taxes </li></ul><ul><li>G L = {1-(1-T C )*(1-T pE )/(1-T p )} </li></ul><ul><li>Bankruptcy costs </li></ul><ul><li>Agency costs </li></ul>
  17. 17. Dividends <ul><li>MM Does not matter </li></ul><ul><li>Lintner behavioural model </li></ul><ul><li>DIV 1 -DIV 0 =Adjustment rate*(target ratio*EPS 1 -DIV 0 ) </li></ul><ul><li>Agency costs/signalling </li></ul>
  18. 18. Working Capital Management <ul><li>Operating cycle, cash conversion cycle, weighted cycles and supply chain management </li></ul><ul><li>Investment in receivables </li></ul><ul><li>Cash management </li></ul><ul><li>EOQ and Miller-Orr models </li></ul>

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