2023
Summary financial - Samenvatting Principles of
Corporate Finance
Summary financial
Chapter 1: Goals and governance of the firm
Capital expenditure (CAPEX): Important investment decision; the expenditure to construct and commision the asset
Operational expenditure (OPEX), the expenditure necessary to operate and maintain the asset during production
Choice between debt and equity financing: capital structure decision
Shareholders want managers to maximize market value
Chapter 2: How to calculate present values
Present value: Cash flow / (1+r)t
r = rate of return -> The opportunity cost of capital, rate that one could have earned by investing in equally risky
investments
Net present value: NPV = PV – investment
Decision rules for capital investments:
- Net present value rule: Accept investments with positive NPV
- Rate of return rule: Accept investments that offer rate of return in excess of their opportunity cost of capital
Perpetuities: Bonds that the government is under no obligation to repay but that offer fixed income for each year to
perpetuity (infinity) Annuity: an asset that pays a fixed sum each year for a specified number of years
Annuity factor: 𝑡 − 𝑦𝑒𝑎𝑟 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑓𝑎𝑐𝑡𝑜𝑟 = 1/r -1/r(1+r)t
Growing perpetuities (constant growth formula): Present value of growing perpetuity = c1/r-g
Chapter 3: Valuing bonds
Bond: Long term loans
Face value: principal payment of the bond
Coupon: yearly interest payment
PV(Bond) = PV(annuity of coupon payments)+PV(final payment of principal)
= (coupon x 4-year annuity factor) + (final payment x discount factor)
Yield to maturity: The return investors get if they buy the bond / rate of return
Higher interest rates result in lower price of bond
The price of long-term bonds is affected more by changing interest rates than short-term bonds
Strip is a treasury bond that makes no annual payments
, Duration is the weighted average of the times when the bonds payments are received
The modified duration or volatility (%) is the duration divided by 1+yield to maturity, this measures the percentage
change in bond price for a 1 point change in yield
Spot rate is the rate of interest per year
The law of one price states that the same commodity must sell at the same price in a wellfunctioning market
Reasons long-term interest rates are higher:
1. You believe that short-term rates will be higher in the future
2. You worry about greater exposure of long-term bonds to changes in interest rates
3. You worry about the risk of higher future inflation
Real cash flow is nominal cash flow adjusted for inflation Fisher’s theory: a change in the expected inflation rate
causes the same proportionate change in the nominal interest rate
Chapter 4: The value of common stocks
Shares could sell more than their book value, this is measured in a couple of different ways
Valuation by comparable is looking at how much investors are willing to pay for each dollar of assets or earnings for
similar firms
PV(Stock) = PV(expected future dividends)
Cash payoff to owners of common stocks comes in two forms: (1) cash dividends and (2) capital gains or losses
Expected return = r = (Dividend + P1 – P0)/P0; This is called the market capitalization rate or cost of equity capital,
which is just the opportunity cost of capital, defined as the expected return on other securities with equal risks
Share value is equal to the discounted stream of dividends per share
Expected return equals the dividend yield (DIV1/P0) plus the expected rate of growth in dividends (g)
Payout ratio is the ratio of dividends to earnings per share; also called the plowback ratio (what percentage of
earnings is reinvested in the company
Return on equity is the ratio of earnings per share to book equity per share Dividend growth rate = g = plowback
ratio x ROE
Do not apply the constant growth formula to firms having high current rates of growth
Stock price can be thought of as the capitalized value of average earnings under a no-growth policy plus PVGO, the
net present value of growth opportunities
A growth stock because the NPV of its future investments accounts for a significant fraction of the stock’s price
Free cash flow (FCF) is the amount of cash that a firm can pay out to the investors after paying for all investments
necessary for growth
A Valuation Horizon (H) stands in for free cash flow in periods after the horizon Valuating a business:
𝑃𝑉 = 𝐹𝐶𝐹1 /1 + 𝑟 + 𝐹𝐶𝐹2 /(1 + 𝑟)2 … + 𝐹𝐶𝐹𝐻/ (1 + 𝑟)𝐻 + 𝑃𝑉𝐻/ (1 + 𝑟)H
Other ways of valuing a company:
- Horizon value based on P/E ratios
- Horizon value based on market-book ratios
Summary financial - Samenvatting Principles of
Corporate Finance
Summary financial
Chapter 1: Goals and governance of the firm
Capital expenditure (CAPEX): Important investment decision; the expenditure to construct and commision the asset
Operational expenditure (OPEX), the expenditure necessary to operate and maintain the asset during production
Choice between debt and equity financing: capital structure decision
Shareholders want managers to maximize market value
Chapter 2: How to calculate present values
Present value: Cash flow / (1+r)t
r = rate of return -> The opportunity cost of capital, rate that one could have earned by investing in equally risky
investments
Net present value: NPV = PV – investment
Decision rules for capital investments:
- Net present value rule: Accept investments with positive NPV
- Rate of return rule: Accept investments that offer rate of return in excess of their opportunity cost of capital
Perpetuities: Bonds that the government is under no obligation to repay but that offer fixed income for each year to
perpetuity (infinity) Annuity: an asset that pays a fixed sum each year for a specified number of years
Annuity factor: 𝑡 − 𝑦𝑒𝑎𝑟 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑓𝑎𝑐𝑡𝑜𝑟 = 1/r -1/r(1+r)t
Growing perpetuities (constant growth formula): Present value of growing perpetuity = c1/r-g
Chapter 3: Valuing bonds
Bond: Long term loans
Face value: principal payment of the bond
Coupon: yearly interest payment
PV(Bond) = PV(annuity of coupon payments)+PV(final payment of principal)
= (coupon x 4-year annuity factor) + (final payment x discount factor)
Yield to maturity: The return investors get if they buy the bond / rate of return
Higher interest rates result in lower price of bond
The price of long-term bonds is affected more by changing interest rates than short-term bonds
Strip is a treasury bond that makes no annual payments
, Duration is the weighted average of the times when the bonds payments are received
The modified duration or volatility (%) is the duration divided by 1+yield to maturity, this measures the percentage
change in bond price for a 1 point change in yield
Spot rate is the rate of interest per year
The law of one price states that the same commodity must sell at the same price in a wellfunctioning market
Reasons long-term interest rates are higher:
1. You believe that short-term rates will be higher in the future
2. You worry about greater exposure of long-term bonds to changes in interest rates
3. You worry about the risk of higher future inflation
Real cash flow is nominal cash flow adjusted for inflation Fisher’s theory: a change in the expected inflation rate
causes the same proportionate change in the nominal interest rate
Chapter 4: The value of common stocks
Shares could sell more than their book value, this is measured in a couple of different ways
Valuation by comparable is looking at how much investors are willing to pay for each dollar of assets or earnings for
similar firms
PV(Stock) = PV(expected future dividends)
Cash payoff to owners of common stocks comes in two forms: (1) cash dividends and (2) capital gains or losses
Expected return = r = (Dividend + P1 – P0)/P0; This is called the market capitalization rate or cost of equity capital,
which is just the opportunity cost of capital, defined as the expected return on other securities with equal risks
Share value is equal to the discounted stream of dividends per share
Expected return equals the dividend yield (DIV1/P0) plus the expected rate of growth in dividends (g)
Payout ratio is the ratio of dividends to earnings per share; also called the plowback ratio (what percentage of
earnings is reinvested in the company
Return on equity is the ratio of earnings per share to book equity per share Dividend growth rate = g = plowback
ratio x ROE
Do not apply the constant growth formula to firms having high current rates of growth
Stock price can be thought of as the capitalized value of average earnings under a no-growth policy plus PVGO, the
net present value of growth opportunities
A growth stock because the NPV of its future investments accounts for a significant fraction of the stock’s price
Free cash flow (FCF) is the amount of cash that a firm can pay out to the investors after paying for all investments
necessary for growth
A Valuation Horizon (H) stands in for free cash flow in periods after the horizon Valuating a business:
𝑃𝑉 = 𝐹𝐶𝐹1 /1 + 𝑟 + 𝐹𝐶𝐹2 /(1 + 𝑟)2 … + 𝐹𝐶𝐹𝐻/ (1 + 𝑟)𝐻 + 𝑃𝑉𝐻/ (1 + 𝑟)H
Other ways of valuing a company:
- Horizon value based on P/E ratios
- Horizon value based on market-book ratios
