# copfin everything

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Published on July 9, 2007

Author: Saxophone

Source: authorstream.com

Corporate Finance:  Corporate Finance Everything….. R Srinivasan Corporate Finance:  Corporate Finance Valuation and Cost of capital Capital budgeting Capital structure, financing and dividend policy Working capital Valuation:  Valuation Generalised valuation Arbitrage and value additivity Patterns Level perpetuity Growing perpetuity Level annuity Growing finite cash flow Valuation:  Valuation Growing finite [t years] cash flow C1/(r-g){1-(1+g)t/(1+r)t} Valuation:  Valuation Compounding intervals (1+r/m)m-1 Continuous compounding Stated and effective rates Nominal and real rates 1+rnominal=(1+rreal)(1+inflation rate) Valuation: Straight Bonds:  Valuation: Straight Bonds YTM Duration Sensitivity of value to changes in interest rates [1*PV(C1)/V]+[2*PV(C2)/V]+[3*PV(C3)/V] V/V = (1+r)/(1+r)*D Valuation: Common Stock:  Valuation: Common Stock Perpetual growth models Sustainable growth P0=No-Growth +PVGO No-growth =EPS1/r PVGO=NPV1/(r-g) where NPV1 =-INV1 +INV1*ROE/r g=Ploughback*ROE EPS1/P0 interpretation Valuation:  Valuation Multiple stages Supernormal stage plus PV of normal growth Free cash flow NOI approach Cost of Capital:  Cost of Capital Security return and standard deviation Portfolio return and standard deviation Diversification Portfolio variance= 1/N Average Var+(N-1)/N Average covariance Systematic and unsystematic risk CAPM Opportunity cost of capital r [rA]and Adjusted cost of capital r* Cost of Capital:  Cost of Capital 1. VL = VU +Tc *D 2. WACC = D/V * (1-Tc) * rD+E/V * rE [Definition of WACC] 3. rE = rA + (rA - rD ) * (1- Tc) * D/E [MM Proposition II] 4. b E = {1+ (1- Tc) * D/E} *b A [If debt is risk free] 5. rE = rf + (rM - rf) *b E [CAPM] 6. WACC= rA *(1- Tc * D/V) MM Valuation:  Valuation Contingent cash flow Call/Put American/European Binomial Black-Scholes Underlying asset price, Exercise Price, Risk-free rate, Volatility, Time Capital Budgeting:  Capital Budgeting NPV and IRR not payback and accounting rate of return Accept/reject single project use NPV or IRR, unless no/multiple IRR Mutually exclusive projects: Same life and risk Use NPV [or IRR of difference between projects] Capital Budgeting:  Capital Budgeting Mutually exclusive projects: Different lives same risk Use NPV-assumes replacement projects have zero NPV. OK for projects with long lives Use NPV-with specific replacements that make project with comparable lives Use replacement chain or EAC Care: Use only real cash flows for EAC Capital Budgeting:  Capital Budgeting Incremental nominal cash flows with empirically measured discount rate Components of cash flow Investment in fixed assets, salvage value Investment in working capital, release Operating revenues/expenses NO INTEREST Capital Budgeting:  Capital Budgeting NPV assumes 'now or never' Real Option framework Abandonment Follow-up Wait and learn Flexibility Capital structure :  Capital structure Market Efficiency MM-1 No taxes MM-2 Corporate taxes Miller Both corporate and personal taxes GL= {1-(1-TC)*(1-TpE)/(1-Tp)} Bankruptcy costs Agency costs Dividends:  Dividends MM Does not matter Lintner behavioural model DIV1-DIV0=Adjustment rate*(target ratio*EPS1-DIV0) Agency costs/signalling Working Capital Management:  Working Capital Management Operating cycle, cash conversion cycle, weighted cycles and supply chain management Investment in receivables Cash management EOQ and Miller-Orr models

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