FM11 Ch 04 Risk and Return_The Basics

... (Diversifiable) Risk 35 Stand-Alone Risk, σ p 20 Market Risk 10 20 30 40 2,000+ # Stocks in Portfolio - 27 Stand-alone Market Diversifiable = risk + risk risk Market risk is that part of a security’s stand-alone ... market risk, so prices and returns reflect this lower risk  The one-stock investor bears higher (stand-alone) risk, so the return is less than that required by the risk 4 - 30 How is market risk ... 0.0% Coll 5.0% 10.0% 15.0% Risk (Std Dev.) 20.0% 25.0% - 19 Portfolio Risk and Return Assume a two-stock portfolio with $50,000 in Alta Inds and $50,000 in Repo Men ^ and σ Calculate rp p - 20...

FM11 Ch 05 Risk and Return_ Portfolio Theory and Asset Pricing Models

... 5-2 Portfolio Theory  Suppose Asset A has an expected return of 10 percent and a standard deviation of 20 percent Asset B has an expected return of 16 percent and a standard deviation ... the correlation between A and B is 0.6, what are the expected return and standard deviation for a portfolio comprised of 30 percent Asset A and 70 percent Asset B? 5-3 Portfolio Expected Return ... Portfolios with Risk- Free Asset (Expected risk- free return = 5%) Attainable Set of Risk/ Return Combinations with Risk- Free Asset Expected return 15% 10% 5% 0% 0% 5% 10% Risk, σp 15% 20% Expected Portfolio...

FM11 Ch 23 Derivatives and Risk Management

... portfolio risk management 23 - 20 How are risk exposures identified and measured?  Large corporations have risk management personnel which have the responsibility to identify and measure risks facing ... substantially in the interim 23 - 19 Chapter 23 Extension: Insurance and Bond Portfolio Risk Management  Risk identification and measurement  Property loss, liability loss, and financial loss exposures ... using risk management techniques in their own portfolios 23 - How can risk management increase the value of a corporation? Risk management allows firms to:  Have greater debt capacity, which has...

FM11 Ch 07 Stocks and Their Valuation

... rs = rRF + (RPM)bi could change  Inflation expectations  Risk aversion  Company risk  g could change 7 - 35 Stock value vs changes in rs and g D1 = $2, rs = 10%, and g = 5%: P0 = D1 / (rs-g) ... 0.06 0 .07 - 15 What is the stock’s market value one year from now, ^ 1? P  D1 will have been paid, so expected dividends are D2, D3, D4 and so on Thus, D2 P1 = rs - g = $2.2427 = $32.10 0 .07 - ... dividend yield and capital gains yield at t = and at t = 3? D1 2.00 t = 0: P = $25.72= 7.8% CGY = 13.0% - 7.8% = 5.2% t = 3: Now have constant growth with g = capital gains yield = 6% and dividend...

FM11 Ch 11 Cash Flow Estimation and Risk Analysis

... capital = 10% 11 - Incremental Cash Flow for a Project  Project’s incremental cash flow is: Corporate cash flow with the project Minus Corporate cash flow without the project 11 - Should you ... judgments 11 - 28 What three types of risk are relevant in capital budgeting?  Stand-alone risk  Corporate risk  Market (or beta) risk 11 - 29 How is each type of risk measured, and how they ...  Cash flow = $25-$3.28=$21.72 11 - 20 Net Cash Flows for Years 1-3 Year Year Year Init Cost -$240,000 0 Op CF $106,680 $120,450 NOWC CF -$30,000 -$900 -$927 Salvage CF 0 11 - 21 Net Cash Flows...

FM11 Ch 28 Advanced Issues in Cash Management and Inventory Control

... ordering costs increase  If Q > EOQ, total carrying costs increase, but ordering costs decrease 28 - 15 Suppose delivery takes weeks Assuming certainty in delivery and usage, at what inventory ... if you view cash as an operating assets, just like inventory  In this view, cash has a carrying cost, which is the opportunity cost for investing the funds, and an order cost, which is the cost ... liquidating marketable securities and transferring the money to a checking account 28 - 24  C = cash raised each time by selling securities or borrowing  r = opportunity cost of holding cash ...

FM11 Ch 25 Mergers, LBOs, Divestitures, and Holding Companies

... losses)(More ) 25 -  Break-up value: Assets would be more valuable if broken up and sold to other companies 25 - What are some questionable reasons for mergers?  Diversification  Purchase of assets ... rate would change the discount rate 25 - 26 Assume the target company has 20 million shares outstanding The stock last traded at $11 per share, which reflects the target’s value on a stand-alone ... in short term won’t change (if they did, it is easy to incorporate that difference)  Long term rsLwill change, so horizon WACC will change, so horizon value will change 25 - 33 New WACC Calculation...

FM11 Ch 24 Bankruptcy, Reorganization, and Liquidation

... creditors when liquidation does occur  Companies in bankruptcy can hurt other companies in industry 24 - 24 Chapter 24 Extension  MDA to predict bankruptcy  Recent business failures 24 - 25 What ... or assignee, and then the assets are sold off 24 - 10 Describe the following terms related to U.S bankruptcy law:  Chapter 11: Business reorganization guidelines  Chapter 7: Liquidation procedures ... (More ) liquidated? 24 -  Should the firm file for bankruptcy, or should it try to use informal procedures?  Who would control the firm during liquidation or reorganization? 24 - What informal...

FM11 Ch 21 Hybrid Financing_Preferred Stock,Warrants, and Convertibles

... convertibles would be exercised Debt would remain outstanding 21 - 43 Recap the differences between warrants and convertibles  Warrants bring in new capital, while convertibles not  Most convertibles ... equity and 20% convertibles or bonds with warrants What effect will the two financing alternatives have on the firm’s WACC? 21 - 35 Convertibles Step 1: Find the after-tax cost of the convertibles ... -1,269.50 -1,332.50 21 - 36 Convertibles Step 2: Find the after-tax cost of straight debt rd (AT) = 12%(0.06) = 7.2% 21 - 37 Convertibles Step 3: Calculate the WACC WACC (with convertibles) = 0.4(7.2%)...

FM11 Ch 19 Initial Public Offerings, Investment Banking, and Financial Restructuring

... 19 - What agencies regulate securities markets?  The Securities and Exchange Commission (SEC) regulates:  Interstate public offerings  National stock exchanges  Trading ... fund 19 - Differentiate between a private placement and a public offering  In a private placement, such as to angels or VCs, securities are sold to a few investors rather than to the public ... in final prospectus 19 - 10 What criteria are important in choosing an investment banker?  Reputation and experience in this industry  Existing mix of institutional and retail (i.e., individual)...

FM11 Ch 18 Distributions to Shareholders_Dividends and Repurchases

... investors 18 - 28 New Stock Plan  Firm issues new stock to DRIP enrollees, keeps money and uses it to buy assets  No fees are charged, plus sells stock at discount of 5% from market price, which is ... increases risk, and doesn’t appeal to any specific clientele  Conclusion: Consider residual policy when setting target payout, but don’t follow it rigidly 18 - 19 Stock Repurchases Repurchases: Buying ... costs hurt investors who have to switch companies due to a change in payout policy 18 - 11 What’s the “information content,” or “signaling,” hypothesis?  Investors view dividend changes as signals...

FM11 Ch 16 Capital Structure Decisions _The Basics

... debt 16 - How can capital structure affect value? V = ∞ ∑ t =1 FCFt t (1 + WACC) WACC = wd (1-T) rd + we rs (Continued…) 16 - A Preview of Capital Structure Effects  The impact of capital structure ... “works.” 16 - 29 Capital Structure Theory  MM theory  Zero taxes  Corporate taxes  Corporate and personal taxes  Trade-off theory  Signaling theory  Debt financing as a managerial constraint 16 ... debt is used 16 - 33 MM relationship between capital costs and leverage when corporate taxes are considered Cost of Capital (%) rs 20 40 60 80 WACC rd(1 - T) Debt/Value 100 Ratio (%) 16 - 34 Miller’s...

FM11 Ch 15 Corporate Valuation, Value-Based Management, and Corporate Governance

... is reported on balance sheets 15 - Total Corporate Value  Total corporate value is sum of: Value of operations Value of nonoperating assets 15 - Claims on Corporate Value  Debtholders have ... share = $376.94 /10 = $37.69 15 - 25 Value-Based Management (VBM)  VBM is the systematic application of the corporate valuation model to all corporate decisions and strategic initiatives  The ... and/ or improving profitability  The expected ROIC of Division B is greater than the WACC, so the division should continue with its growth plans 15 - 39 Two Primary Mechanisms of Corporate Governance...

FM11 Ch 14 Financial Planning and Forecasting Pro Forma Financial Statements

... 14 - Financial Planning and Pro Forma Statements  Three important uses: Forecast the amount of external financing that will be required Evaluate the impact that changes in the ... Set appropriate targets for compensation plans 14 - Steps in Financial Forecasting  Forecast sales  Project the assets needed to support sales  Project internally generated funds  Project ... sooner: Decreases spontaneous liabilities, increases AFN 14 - 12 Projecting Pro Forma Statements with the Percent of Sales Method  Project sales based on forecasted growth rate in sales  Forecast...

FM11 Ch 10 The Basics of Capital Budgeting_Evaluating Cash Flows

... if the cash flows of one are unaffected by the acceptance of the other mutually exclusive, if the cash flows of one can be adversely impacted by the acceptance of the other 10 - What is the ... equal the PV of costs TV is found by compounding inflows at WACC Thus, MIRR assumes cash inflows are reinvested at WACC 10 - 29 MIRR for Franchise L (r = 10% ) 10% -100 .0 10. 0 60.0 80.0 10% 10% ... cost of capital Capital rationing 10 - 51 Increasing Marginal Cost of Capital  Externally raised capital can have large flotation costs, which increase the cost of capital  Investors often...

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