final review june 9 th, 6 p.m. office hours next week: m 9-12
TRANSCRIPT
Final review
June 9th, 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
– 2 shorter questions – lease vs. buy, rights offering, venture capital method
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?
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?
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.
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
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?
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?
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?
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?