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Samenvatting Advanced Corporate Financial Management colleges
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By: tonkoekkoek • 7 year ago
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Week 1: Chapter 2/6, CB1, CB4, Paper Zingales, Paper HarveyThe market value of equity is on average 2.5% higher than the book value of equity = Tangible assets
How to measure these:
By calculating the expected future revenue
Looking at peer companies
How to understand the business?
Understand the business (profile)
1. Business Return: By cash flows
2. Business Risk > Equity Risk (measure by price)
Finance Risk > Debt Risk (measure by price) WACC
A company should have a balance between business and financing risk. If this is not the case, the
financing costs of a company will increase due to the extra credit premium
Finance risk = risk to the debt holders.
Debt holders get paid first, they demand for an extra premium for the default risk
Long term
Short Term
Business risk = risk to the equity holders
Return
Risk
When it is a good investment?
Compare the WACC with the ROIC (at least 10% to make it a good investment)
Business Risk = Risk of the firm’s assets when no debt is used (market based). Factors that affect
business risk:
Sales risk
Input risk
Cost risk
Financing Risk = takes into account a company’s leverage. High leverage is high risk to stakeholders. Can
you easily pay the money back to your stockholders?
Ultimate goal of a company = Maximize the shareholders’ value
Assumptions in the neo-classical finance theory
All companies have same goal
All business cash flows are given
Perfect market; capital will flow to business opportunities
No tax, no transaction costs, no distress
Symmetric information, no agency costs
Investors are risk averse
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