1 mn20211 advanced corporate finance revision session
TRANSCRIPT
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MN20211
Advanced Corporate Finance
Revision Session
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Revision SessionCourse Overview
• The Investment Decision
• Risk and Return
• Debt and Equity and some Investment
• Mergers and Acquisitions
• Project Finance
Run through major points and discuss types of questions that could come up
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Revision Session
• Investment Decision My Web, MN20211Capital Investment
Decision
1. General - Ways to evaluate - NPV vs IRR - Scale and time and capital rationing
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Revision Session Capital Investment Decision
• NPV We have to look at all the relevant, incremental
cash flows - Taxes/tax losses - Opportunity costs - Depreciation - Working capital - Cannibalisation - Opportunity cost - Terminal values
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Capital Investment DecisionFrom
Table 7.1 HomeNet’s Incremental Earnings Forecast (Spreadsheet)
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Capital investment DecisionTo
Table 7.3 Calculation of HomeNet’s Free Cash Flow (Including Cannibalization and Lost Rent)
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Revision SessionCapital Investment Decision
• Break even analysis
Using the IRR to give a feel for the ‘margin of safety’ ref the cost of capital
• Sensitivity analysis
• Scenario analysis
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Revision Session
Applying the NPV rule MN20211 NPV2
1. WACC
- Assumes you know the financing mix
2. Adjusted NPV
- Work out the present value of the tax shield
3. Free Cash Flows to Equity
- Deduct payments to debt holders and discount at cost of equity
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Revision Session
• Sort of Questions• Numbers -From Earnings flow to incremental cash
flow plus decision -WACC, APV, FTE• Chatty - NPV vs IRR - Ways to gain confidence in numbers
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Revision Session
• Weighted Average Cost of Capital
• MN20211Risk and Return
Cost of debt, Easy, well sort of
Cost of Equity, Tricky
- Expected return, Variance, Standard deviation, Portfolio, Capital Asset Pricing Model
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Revision Session
• Other models
- Gordon Dividend Growth Model
What is it?
- Arbitrage Pricing Theory
What is it?
Weighted Average Cost of Capital
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Revision Session Weighted Average Cost of Capital
• Sorts of Questions
• Numbers
• Work out the WACC given numbers for the
1. CAPM
- Know the equation, risk free, market premium, return on the market, beta etc
2. Gordon dividend growth
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Revision Session Weighted Average Cost of Capital
2. Gordon dividend growth
Know the equation, share price, dividends, growth implied or given
3. After tax cost of debt
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Revision Session
• Chatty
- What is CAPM? diversified/undiversified, systematic unsystematic, beta, covariance market portfolio etc
- Discuss the various models
Weighted Average Cost of Capital
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Revision SessionFunding
• MN20211 Equity and debt, Debt/bonds and Investments
1. Equity and Debt. Mainly about equity after some brief revision. So
- Sources and then focus on IPO’s
- Reasons for listing
- Process for listing
- Methods/mechanics of selling
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Revision SessionEquity/IPO’s
- IPO puzzles
Seasoned offerings
- mechanics
Sort of questions
Mostly chatty i.e. process, puzzles etc could be numbers on rights issues
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Revision Session
• Bonds
• Very brief mainly mechanics
• Investments
- Types and pitfalls of the ways in which yields may be calculated.
- Sort of question. Mainly chatty e.g. what is? When would it be used? Criteria for investing? What pitfalls to watch out for?
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Revision SessionMergers and Acquisitions
• Definition• Types of M&A• Motivations for M&A - strategic etc, bootstrapping• Do they work?• Determinants of success• Valuation• Form of payment• Defence - Pre, during and post bid• Codes, rules and regs
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Revision SessionMergers and Acquisitions
• Sorts of questions
• Numbers could be bootstrapping or valuations but probably not detailed cash flows as per Be&DeM
• Chatty
Types of/ motivation for
Success or lack of it
Defences
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Revision SessionProject Finance
• MN20211Projectfinance and following files to Equity and debt.
• What is it?
• Why use it?
• Risks involved
• Process
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Revision SessionProject Finance
• Risk analysis and risk sharing - Pre construction, construction and post
construction• Causes of failure• Funding - the layers of debt * senior, subordinated, mezzanine etc features
and advantagesmulti sourcing e.g. aid subsidies export guarantees
etc
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Revision SessionProject Finance
• Sorts of questions
• Chatty. What is it?
• Why?
• What risks involved in a project?
• Structure of financing
Good Luck