Corporate Finance

Normal cash flow mutually exclusive projects, intersect horizontal axis at point where discount rate
equals IRR. Cross over rate is where discount rate at which NPV of projects are equal.

Trade credit and bank credit are primary source of liquidity, inventory is second

Soverign yield spread = annualized standard dev of equity index/ developed market curren

SEC is ex dividend date, corporation determines holder of record date

The WACC does not necessarily increase as more funds are being raised, higher amounts of funding
would not change the WACC if everything were in proportion to the old target capital structure it is the
changes in relative proportions of sources of funding that could make a difference because of interest
deductibility and financial risk.

An increase in debt will increase interest expense which will decrease net income but not operating
income which is calculatd before subtracting interst expense. For a profitable firm the decrease in net
income will be offset by the decrease in equity from the recpurchase of common stock so that ROE
increases. The increase in leerage will hoever increase variability for ROE.

Capital component break point =

𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑤ℎ𝑖𝑐ℎ 𝑐𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡 𝑜𝑓 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐ℎ𝑎𝑛𝑔𝑒𝑠
⁄𝑤𝑒𝑖𝑔ℎ𝑡 𝑖𝑛 𝑊𝐴𝐶𝐶

Ex 3 million new debt 30% of debt capital structure

Financing costs should not be included in incremental cash flows. They are reflected in the weightd
average cost of capital. Externality= positive negative affects of accepting a project should be added
opp cost = sell business for new funds

Pure play: asset beta calculated by removing the effects of leverage from the comparable companys
equity beta then a project beta is estimated by adjusting the asset beta based on the capital structure of
the company.

Business risk: sales (variability of firm sales) and operating (additional variability by fixed operating cost)

The investment opportunity schedule is downward slopping curve of interest rates of return and
potential projects ranked from highest to lowest. This curve interests the companys upwars sloping
marginal cost of capital curve at an amount of capital where marginal projects IRR just equals firms cost
of capital . ACCEPT PROJECTS WHERE IRRS EXCEED MARGINAL COST OF CAPTIAL.

Yield on debt < earnings yield financing a share repurchase will increase earnings per share

CAPM

Dividend growth rate (0.3)(0.2)

Cost of equity is 3/50 + 6 = 12

The percentage of EPS caused by a 1% change in sales is the total degree of leverage DTL. A degree of
operating leverage greater than 1 results from fixed operating costs.
Take over defence: poison pill seen as negative shareholder value

Adjust flotation costs at the initial project, adjusting the WAC is incorrect because floations costs are
cash outflows at the initiation of a project rather than on going expense.

Capital rationing: prioritizing projects to maximize increase in company value

Project sequencing more tan one project

Capital preservation: return at least equal to inflation rate

Green mail: repurchasing shares at a premium to their market value by direct negotiation with a
potential acquirer of the firm.

NPV Method assumes cash flows reinvested at projects cost of capital, IRR method itself

If two companies have the same capital structure equal weights of devt and equity, same pretax
components of capital. If one company has a higher tax rate the after tax cost of debt will be lower and
the wacc and MACC will be lower as well. A tax increase will affect the other companys WACC more
since first company is already lower.

Options for liquidity: t bills, bank certificates, acceptances, repurchase agreements, com paper,
adjustable rate pref stock (Short term savings )

A high cash conversion cycle indicates too much inventory

NPV Profile= graph plots relationship (Expected value added) of a project and cost of capital used to
discount future cash flows

Four step process: generate ideas, analyze, create budget and post audit