Summary Corporate Finance BAB24 - Overview of important concepts - Ch12,14-20, 22-25, 30
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Course
Corporate Finance (BAB24)
Institution
Erasmus Universiteit Rotterdam (EUR)
Book
Corporate Finance
This document gives an overview of all the important concepts to be studied during the IBA course Corporate Finance (BAB24). You can use to study for the exam or to check whether you know everything.
This is a list of concepts that I personally thought were important, however,
rather use this as an overview instead of a summary. Just studying this by heart
will not make you pass! Also make sure you practice enough exercises. 😊
Goodluck!
This summary included chapter 12, 14-20, 22-25 and 30.
Book: corporate finance, 3rd edition, hillier.
When it mentions the formula sheet, it refers to the formula sheet given during
the exam.
Concepts to be studied
Concept: CAPM Use for: Cost of Equity Re -> Rwacc,
1. ℜ=Rf + β ( Rm−Rf ) = Capital Asset Pricing Model
Rm – Rf is called the risk premium
R stands for expected return -> cost of equity/market/risk free rate
Concept: YTM Use for: Rd
1
1−
(1+ r )t FV
P=FV x C x + t
r (1+r )
P = par value fv = face value c = coupon % r = interest rate t = period (years)
Always semi annually! -> in the end, multiply x2 to get annual rate
You can use the annuity table for the marked part of the formula
Concept: Rwacc Use for: NPV, Value of firm
E D
R wacc= x ℜ+ x Rd x (1−Tc)
D+ E E +D
Concept: BETA Use for: CAPM formula
Cov(Ri , Rm)
1. = Beta of security i
Var (Rm)
Problems: 1. Beta’s may vary over time / 2. Sample size may be inadequate / 3. Influenced by financial leverage
(not included)
, Beta is the measure of risk Close to 1 = stable
Determinants of beta are: High beta = volatile = risky
- Cyclicality of revenues Low beta = low risk = often regulated market
- Operating leverage
- Financial leverage
E
2. βe= x βa Beta of equity
E+ ( 1−Tc ) D
Concept: Economic Value Added (EVA) Use for: Determine whether or not to take
on a project, preferred over just ROA
1. ( ROA−Rwacc ) x total capital = Earnings after capital costs
Incorporates that a high return on a large division may be better than a very high return on a smaller division
Critics: 1. Focuses only on current earnings / 2. May increase short sightness of managers
Concept: Long-term financing Theoretical concept
1. Equity
Ordinary shares = equity that has no special preference in either dividends or bankruptcy
Par value = face value, total par value = dedicated/called-up capital of a firm
Authorized shares = number of shares a company can issue, some gov. impose tax based on this and it might
create concerns with investors
Additional paid-in capital = total difference amount paid – par value
Book value = Total equity / shares outstanding
Market value = Share price
Rights of shareholders:
1. The right to share proportionally in dividends
a. Dividends: return on the capital, not a liability, not an expense -> distributed after tax, are
considered as ordinary income by tax authorities
2. … to share proportionally in assets remaining after liabilities have been paid (bankruptcy)
3. … to vote on matters of great importance to them, e.g. mergers.
4. … to share proportionally in any new equity sold = pre-emptive right
2. Debt
Main differences debt & equity:
1. Debt is not an ownership interest in the firm
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