Corporate Finance Exam 1

Corporate Finance Financial break-even - Answer- Financial break even NPV solved=0, OCF* for NPV=0 Q=(FC+OCF*)/ (P-v) v=variable cost per unit General Break-Even - Answer- Q=(FC+OCF) /(P-v) Constant Growth Model (infinite) - Answer- a widely cited dividend valuation approach that assumes that dividends will grow at a constant rate, but a rate that is less than the required return Constant Growth Model (finite) - Answer- Should include terminal value (what you sell it for) @ end To do so you calculate the non-constant growth rate until horizon date T...then calculate the terminal value as you would in an infinite CGM w/ denominator raised to power T expected rate of return (constant growth model) - Answer- The rate of return expected to be realized from an investment; the weighted average of the probability distribution of possible results capital gains yield - Answer- the dividend growth rate, or the rate at which the value of an investment grows Dividend Yield - Answer- a stock's expected cash dividend divided by its current price terminal value (Horizon Value) - Answer- the sale price at the end of the expected holding period Perpetual Growth Method - Answer- dividing the last cash flow forecast by the difference between the discount rate and terminal growth rate. The terminal value calculation estimates the value of the company after the forecast period. (FCF * (1 + g)) / (d - g) Free Cash Flow Valuation Model - Answer- A model that determines the value of an entire company as the present value of its expected free cash flows discounted at the firm's weighted average cost of capital, which is its expected average future cost of funds over the long run. FCF Constant Growth Model - Answer- A variation of the constant growth model Market Multiple Analysis - Answer- A method of valuing a target company that applies a market determined multiple to net income, earnings per share, sales, book value, and so forth. Preferred Stock Dividends - Answer- Fixed. Have priority over common stock dividends. convertible preferred stock - Answer- Preferred stock with an option to exchange it for common stock at a specified rate. cumulative preferred stock - Answer- Preferred stock on which undeclared dividends accumulate until paid; common stockholders cannot receive dividends until cumulative dividends are paid. Free Cash Flow - Answer- net operating profit after taxes (NOPAT), add in depreciation expense, then subtract money set aside for capital expenditures and any need for increasing working capital Capital Asset Pricing Model (CAPM) - Answer- a model that relates the required rate of return on a security to its systematic risk as measured by beta call option - Answer- the option to buy shares of stock at a specified time in the future put option - Answer- the option to sell shares of stock at a specified time in the future Cash Conversion Cycle (CCC) - Answer- the length of time funds are tied up in working capital, or the length of time between paying for working capital and collecting cash from the sale of the working capital Return on Equity (ROE) - Answer- Net Income/Total Equity Weighted Average Cost of Capital (WACC) - Answer- the weighted average of the cost of equity and the aftertax cost of debt Why is Equity more expensive than Debt? - Answer- Because it comes w/ higher expected rate of return due to higher risk (residual claimant of the firm's cash flows) Levered Beta - Answer- The unlevered beta adjusted for financial risk due to leverage Unlevered Beta - Answer- The firm's beta coefficient if it has no debt working capital requirement - Answer- (Current assets - inventory) - current liabilities Net Present Value (NPV) - Answer- the sum of the present values of expected future cash flows from an investment, minus the cost of that investment