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Final review

Final review. June 9 th , 6 p.m. Office hours next week: M 9-12. Exam format. Material: Ch. 7-9, 11, 12 10 multiple choice, 5 short answer Short answer questions from: 3 major questions – capital structure analysis, dividend policy analysis, valuation

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Final review

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  1. Final review June 9th, 6 p.m. Office hours next week: M 9-12

  2. Exam format • Material: Ch. 7-9, 11, 12 • 10 multiple choice, 5 short answer • Short answer questions from: • 3 major questions – capital structure analysis, dividend policy analysis, valuation • 2 shorter questions – lease vs. buy, rights offering, venture capital method

  3. Major topics • Capital structure analysis • Qualitative analysis • Advantages of debt: tax benefit, added discipline • Disadvantages of debt: bankruptcy costs, agency costs, loss of financial flexibility • What are these advantages and disadvantages a function of?

  4. Major topics • Capital structure analysis • Qualitative analysis • Advantages of debt: tax benefit, added discipline • Disadvantages of debt: bankruptcy costs, agency costs, loss of financial flexibility • What are these advantages and disadvantages a function of?

  5. Major topics • Capital structure analysis • Quantitative analysis (cost of capital approach) • Optimal capital structure for a firm is where WACC is minimized. • How much does firm value increase by moving to the optimal? • What is the ‘cost’ of the constrained optimal? • How do we get to the optimal? • Quickly or gradually? (bankruptcy threat? Takeover target? Industry average?) • Methods of getting to optimal • Recapitalization, divestiture, dividend policy change, project investment capital.

  6. Major topics • Dividend policy analysis • Evaluate the firm’s payout policy relative to the FCFE that the firm generates • Assess the firm’s project quality by comparing ROC to WACC • Other considerations: • Cash balance • Firm’s capital structure adjustment

  7. Major topics • Valuation • Relative valuation: • How do we come up with an intrinsic value for a stock given a particular multiple and a particular set of comparable firms? • What are the assumption that we make for relative valuation overall? What are the assumptions that we make for each of the multiples (P/E, P/BV, P/S, EV/EBITDA) that we have discussed?

  8. Major topics • Valuation • Discounted Cash Flow Valuation: • How do we come up with an intrinsic value for a stock? • How do we come up with estimates for: current growth rate, current FCFE, cost of equity, terminal value? • How do we determine whether to use a single-stage (stable growth) model or a multi-stage model?

  9. Minor topics • What are the equity, debt and hybrid choices for firms when raising capital for investment? What are their advantages and disadvantages? • How does a firm determine whether to use an operating lease or a capital lease? • What is the process by which firms raise equity capital through VCs? Through an initial public offering?

  10. Minor topics • How do we determine what proportion ownership a VC receives for their investment in a firm (VC method)? • What is the value of a right (in a rights offering)? What are the advantages of rights offerings?

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