Samenvatting Corporate Finance
Chapter 12
Additional cash:
- Pay out as a dividend
- Invest in a project
The discount rate of a project should be the expected return on a financial asset of
comparable risk
Expected return = equity cost of capital = Re = Rf + B x (Rm-rf)
Rm-rf = market premium
r j=r f + β j ×[E ( R m )−r f ].
Where r j is the return on security j (e.g. a stock), E ( Rm ) the return on the market portfolio, r f
the risk free rate.
The β j is called the “CAPM beta” This is the measure of risk we will use
Beta
- Measure of sensitivity of a stocks return to the market returns
- Measure of a stocks systematic risk
- Measure contribution of stock to the risk of a diversified portfolio
Beta of a security = covariance (Rsecurity, Rmarket)/Variance(market)
COV ( r j , E ( Rm ) )
β j= 2
σ ( E ( R m ))
- Cyclical nature of revenues
- Operating leverage – how revenue growth translated to growth in operating income
- Financial leverage –extent to which firm relies on debt in capital structure
Projects whose revenues appear strongly cyclical and whose operating leverage appears high
are likely to have high betas.
Asset beta when firm is financed with only equity (unlevered)
S B
Basset = β Asset = × β Equity + × β Debt
B+ S B+ S
, ( BS )
Bequity = β Equity =β Asset × 1+
High beta >2
- More volatile than the market
Low beta <1
- Utilities (gas, water)
- Demand even in economic downturns
Systematic risk: any risk that affects a large number of assets
Unsystematic risk: affects a single asset
WACC: Average cost of capital with tax =) RWACC = ( B+S S ) × R +( B+B S )× R × (1−t )
e d C
Liquidity: cost of buying and selling
Costs to trade:
- Brokerage fees
- Bid-ask spread
- Market impact costs
Because the expected return to the investor is the cost of capital to the firm, the cost of
capital is positively related to beta
Adverse selection: if one party in a deal has more information than the other protect by
raising the price
Firms have an incentive to lower trading costs because it leads to lower costs of capital
- Bring in more uninformed investors
- Disclose more information
Economic value added (EVA): (ROA – WACC) x total capital
- ROA can be substituted for earnings after tax
mT
r
Compounding over many years: FV =C 0 1+ ( ) m
rT
∨FV T =C 0 × e
FV T future value at the end of T years
C 0 intial investment
r stated annual interest rate
T number of years over which the investment runs
e Euler’s number
Annuity is a stream of regular payments that lasts for a fixed number of periods
C C C C C
+ + + + …+
1+ r ( 1+r ) ( 1+r ) ( 1+r )
2 3 4
(1+ r )T
, C is a coupon (level payment, always the same)
r stated annual interest rate
T amount of periods for which C is received
NPV: the difference between the sum of the present values of the projects future cash flows
and the initial cost of the project
If IRR > discount rate accept project
If IRR < discount rate reject project
The expected return on a portfolio is a weighted average of the expected returns on the
individual securities
Hedge: when one security goes up, the other goes down (offsetting each other)
Capital market line
Chapter 13
Create valuable financing opportunities:
- Investors lack an understanding of the risk and valuation of complex securities
- Reduce costs or increase subsidies
- Create a new security
An efficient capital market is one in which share prices fully reflect the available information
Press release value stock will go up
Efficient market hypothesis:
- Information is reflected in prices immediately, only expect a normal rate of return
- Firms should expect fair value
- Financial managers cannot time equity and bond sales
- Managers cannot boost share prices through creative accounting
Conditions that cause market efficiency:
- Rationality
- Arbitrage: making a profit without having a risk
Weak form of efficiency: fully incorporates the information in past share prices
Semi-strong form of efficiency: prices reflect all publicly available information
Strong form of efficiency: reflect all information, public or private
Chapter 12
Additional cash:
- Pay out as a dividend
- Invest in a project
The discount rate of a project should be the expected return on a financial asset of
comparable risk
Expected return = equity cost of capital = Re = Rf + B x (Rm-rf)
Rm-rf = market premium
r j=r f + β j ×[E ( R m )−r f ].
Where r j is the return on security j (e.g. a stock), E ( Rm ) the return on the market portfolio, r f
the risk free rate.
The β j is called the “CAPM beta” This is the measure of risk we will use
Beta
- Measure of sensitivity of a stocks return to the market returns
- Measure of a stocks systematic risk
- Measure contribution of stock to the risk of a diversified portfolio
Beta of a security = covariance (Rsecurity, Rmarket)/Variance(market)
COV ( r j , E ( Rm ) )
β j= 2
σ ( E ( R m ))
- Cyclical nature of revenues
- Operating leverage – how revenue growth translated to growth in operating income
- Financial leverage –extent to which firm relies on debt in capital structure
Projects whose revenues appear strongly cyclical and whose operating leverage appears high
are likely to have high betas.
Asset beta when firm is financed with only equity (unlevered)
S B
Basset = β Asset = × β Equity + × β Debt
B+ S B+ S
, ( BS )
Bequity = β Equity =β Asset × 1+
High beta >2
- More volatile than the market
Low beta <1
- Utilities (gas, water)
- Demand even in economic downturns
Systematic risk: any risk that affects a large number of assets
Unsystematic risk: affects a single asset
WACC: Average cost of capital with tax =) RWACC = ( B+S S ) × R +( B+B S )× R × (1−t )
e d C
Liquidity: cost of buying and selling
Costs to trade:
- Brokerage fees
- Bid-ask spread
- Market impact costs
Because the expected return to the investor is the cost of capital to the firm, the cost of
capital is positively related to beta
Adverse selection: if one party in a deal has more information than the other protect by
raising the price
Firms have an incentive to lower trading costs because it leads to lower costs of capital
- Bring in more uninformed investors
- Disclose more information
Economic value added (EVA): (ROA – WACC) x total capital
- ROA can be substituted for earnings after tax
mT
r
Compounding over many years: FV =C 0 1+ ( ) m
rT
∨FV T =C 0 × e
FV T future value at the end of T years
C 0 intial investment
r stated annual interest rate
T number of years over which the investment runs
e Euler’s number
Annuity is a stream of regular payments that lasts for a fixed number of periods
C C C C C
+ + + + …+
1+ r ( 1+r ) ( 1+r ) ( 1+r )
2 3 4
(1+ r )T
, C is a coupon (level payment, always the same)
r stated annual interest rate
T amount of periods for which C is received
NPV: the difference between the sum of the present values of the projects future cash flows
and the initial cost of the project
If IRR > discount rate accept project
If IRR < discount rate reject project
The expected return on a portfolio is a weighted average of the expected returns on the
individual securities
Hedge: when one security goes up, the other goes down (offsetting each other)
Capital market line
Chapter 13
Create valuable financing opportunities:
- Investors lack an understanding of the risk and valuation of complex securities
- Reduce costs or increase subsidies
- Create a new security
An efficient capital market is one in which share prices fully reflect the available information
Press release value stock will go up
Efficient market hypothesis:
- Information is reflected in prices immediately, only expect a normal rate of return
- Firms should expect fair value
- Financial managers cannot time equity and bond sales
- Managers cannot boost share prices through creative accounting
Conditions that cause market efficiency:
- Rationality
- Arbitrage: making a profit without having a risk
Weak form of efficiency: fully incorporates the information in past share prices
Semi-strong form of efficiency: prices reflect all publicly available information
Strong form of efficiency: reflect all information, public or private
