Summary Corporate Finance BAB24 - Overview of important concepts - Ch12,14-20, 22-25, 30
71 views 1 purchase
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
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller lisannebak. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.20. You're not tied to anything after your purchase.
