Final Cheat Sheet - FIN 431 PDF

Preview

Summary

This has everything you need for the Final with Ganguly...

Description

Expect Price=[(P1-P0)+D]/P0 | Share Price=(Ent. Val+Cash-Debt)/#Shares | Ent Val = MVE+Debt-Cash+P/S+Min Int | Incr CFs=CF W/ Proj-CF W/out Proj NOPAT=EBIT(1-T) | NWC=Curr Ass-Curr Liab | Util Func=E(R)-(A/2)(σ2);A=Risk Aversion | Regressing Stock Returns=Ri=a+b(Rm) NPV=Σ[(CFt )/(1+r)t]-CF0; PV Cash Inflows - PV Cash Outflows; E(CF)/(1+k) | WACC=[(D/V)x(rd)x(1-T)]+[(E/V)x(re)] | Ent Value=Multiple x EBITDA IRR=Σ[(CFt )/(1+IRR)t]-CF0=$0 | Rate Of P/S=(Dps/Nps) | CAPM/ Unlev Cost Of Cap = Rf + [β x (Rm-Rf) | FCF=NI+Deprec+Interest(1-T)-CapEx- ∆NW V=[(FCF1)/(1+WACC)]+[(FCF2)/(1+WACC)2]+..+[(FCFt)/(1+WACC)t]+[1/(1+WACC)t]x[(FCF(t+1)/(WACC-g)] |Growing Perpetuity Model=P0=[D1/(rs-g)] V0=CF0+CF1.../(1+K0) | Price/Share=Firm Val/# Shares | APV=VL=VU+[(RDxDxTC )/RD] OR VU+D+TC ; FYI (VL=VU plus PV of Tax Shield) | VU=FCF1/(ru-g) Bond Val=(C/R)[1-(1/(1-r)t)]+[FV/(1-r)t} | Beta= (covim)/(market variance)= [(SDi)/(SDm)]x Correlation | P/E=(D/rE-g)/E = (Ex(1-b)/rE-g)/E = (1-b) / rE-g Beta Unlev =(BL) / (1+(1-T)(Debt(of comp))/Equity(of comp)) | PV Of Growing Annuity=[CF/(r-g)] x [1-(1+g/1+r)n] | IRR=[FV/PV]1/n - 1 | FCF = NI + Deprec. + Interest(1-T) - CapEx - ∆NWC | V(AT)>V(A)+V(T) | PV(X)=Ex Price/erfr x n | Put-Call=P=C-S+PV(X) | Call Option= P+S – PV(X) Pays annual CF 1 yr from now (w/ g): PV=CF/(r-g) | Valid Multiple=(MVE+Net Debt)/EBITDA=Ent Val/EBITDA | P/E= EV/EBITDA; EV/Sales=EV/FCF P = stock price, EV = Market Cap + Debt) P/B; EV/TA | Terminal Value=[FCF(T+1)/(WACC-g)] | Synergy Val=Val of comb firm w/ Synergy+Val on comb firm w/out syn | ROE=(NI/Sales)*(Sales/Ass)*(Ass/Eq)=(PM)*(Asset TO)* (Equity Mult) | Black Scholes = SN[d1]-X(e^(-rt))N[d1]; d1=[ln(S/X)+ (r+σ2/2)t]/σ√(t);d2=d1-σ√(t); q=Div Yield; S=Curr Ass Price; X=Strike Price; N(x)=Prob | BS With Div =S(e^-qt)N[d1]-X(e^-rt)N[d2]; d1=[ln(S/X)+(rq+σ2/2)t]/σ√(t) | Corp Bankrupt=3.3*(EBIT/Ass)+1.2*(NWC/Ass)+1.0*(Sales/Ass)+ .6*(MVE/BVDebt)+1.4*(RE/Ass); Where Z> 2.99 no bankrupt, 1.81≥Z≤2.99 gray area, Z 2.90 no bankrupt, 1.23≥Z≤2.90 gray area, Z DCF value bc premium Bankruptcy, Liquidation; Possible by creditors-Consequence of borrowing Q2. Gold mining company with Substantial undeveloped reserves of gold and Causes: Economic: Industry, Location, Product Financial: Too much Debt, Relatively little gold production. Which combo will make reserves more Insufficient capital & Neglect/Fraud valuable? High gold prices with high volatility in those prices. Also: Liquidity Crisis: Cash shortage Insolvency: Negative net worth, Liab > Q3. Cost of investment is $500 million, and expected PV of the CFs will be $400 Ass (Flow-Based Insolvency: CFs not enough for contract required payments; million. What is the NPV of taking the project? $400 - $500 = -$100 million B/S Insolvency: Value of Assets < BV of debt) Q4. Suppose that the current stock price is $52 and the rfr is 5%. You have Covenant Violation/Technical Default: Violation on debt coverage = early found a quote for a 3-month put option with an exercise price of $50. The put distress sign, creditors take action price is $1.5. Estimate the price of the 3-month call option. Economic Distress: Business is going down - Can happen regardless of =$1.5+$52-($50/e^(.05x.25)=$4.1211 liability/financial choices (usually occur w/ Fin Distress) Q5. Estimated oil reserve of 50 million barrels of oil; cost of developing reserve Default: Fail to meet contract oblig Is $600 mill, development lag is 2 years. Rights to exploit this reserve for the Workout: Renegotiate w/ creditors out of court next 20 years, and the marginal value (price per barrel – marginal cost per barrel) Bankruptcy: Legal system to fix conflicts b/een claimants in structured formal process (Liquidation Process: Ch 7- Smaller firms; Reorganization Process: Ch per barrel of oil is $12. Once developed, the net production revenue each year will be 5% of the value of the reserves. The riskless rate is 8%, and the variance 11- Creditor claims are frozen while reorg plan is put together, can lead to Ch 7) Liquidation: Assets sold & firm not exist (Bankruptcy may/may not result) in oil prices is 0.03. Value this oil reserve using Black-Scholes. Bond Default: Fail to meet scheduled payments of interest or principal, Current Val Asset = S = $12 X 50/(1.05)2=$544.22 mill Ex Price = Cost of developing =$600 mill; d1 = 1.0359; N(d1) = 0.8498 Bankruptcy filing, Distressed bond exchange d2 = 0.2613; N(d2) = 0.6030; Distressed Bond Exchange: Renegotiate w/ bondholders in distressed situation, goal to avoid bankruptcy Call Value = 544.22 e(-0.05)(20) (0.8498)-600 e(-0.08)(20) (0.6030) = $97.08 million. Though not viable at current prices still valuable because of Bank Loans: Meet w/ bankers, change terms Public Bonds: Trickier to negotiate - Require approval of all bondholders (100% its potential to create value if oil prices go up. Q5. Ole Miss wants to buy Inc. for $500 million. Ole Miss will invest 30% of the is unrealistic) purchase price in equity. In 5 years, Ole Miss Private Equity expects to sell Inc. Bond Exchange Offers: Public offer to exchange for new debt/equity/cash, For 7.1x Year 5 EBITDA of $96.6 million. Ole Miss expects Inc. to have a net Bondholders not participating maintain their claims debt of $200 million at the time of exit. Calculate the IRR to Ole Miss. Hold-Out Problem: No better off exchange off exchanging bonds for new bonds Step 1: Equity-in at Entry=$500x30%=$150 mill; of same priority but w/ smaller principal, Exchange offer for bonds will fail even though bondholders would be better off if it succeeded Step 2: Equity-out at Exit (after 5yrs.) = 7.1 x 96.6 - 200 = $485.9 million; Step 3: IRR = [485.9/150]1/5 - 1 = 26.5% All else equal, better w/ Senior Bond than Junior Bond (Junior paid last in Lecture 19: Real Options-Mercury Athletic bankruptcy) Types of Options: Call Option: Right to buy given quantity of some assets at Lecture 22: Bankruptcy & Restructuring - Marvel time in future - price agreed today (Holder-Buyer: Right 2 buy; Writer-Seller: Bankruptcy Goal: Realize highest firm value, Liquidate when NPV Ops is (-) Obligation 2 sell) Put Opt: Right 2 sell given quantity of some asset at future Initiation: By Debtor: Voluntary bankrupt (usual), By Creditor: “Petitions” a time - price agreed today (H-B: Right 2 sell; W-S: Obligation 2 buy) court to declare bankruptcy American Option more valuable than Euro Option bc freedom to exercise Bankruptcy Adv: Provided time for reorganization, DIP financing provides cash any time before expiry date (Debtor-in-Possession), Don’t need full agreement for reorganization Approaches: Put-Call Parity: Relationship b/een price of call and a put w/ same Bankruptcy Disadv: Expensive, Lose control of process, Mngmt stays in control strike price and expiry date (assets not exercised before expiry) | Binomial: Use Workout Adv: Avoid stigma of bankruptcy, minimize costs, flexible to negotiate discrete time lattice & no arbitrage argument that enables us to price opt w/ individual creditors Workout Disadv: No automo stay, No DIP, Need to negotiate w/ indiv creditors Black Scholes: Continuous time closed form solution Trustee: Supervise initial stages of bankruptcy & take control of debtor assets Real Options: Underlying ass is physical not financial Bankrupt Order of Claims: 1.Court fees, tax claims,unpaid wages 2. New DIP Strategic Option: Project providing more future projects Lenders 3. Secured Creditors 4. Unsecured Creditors 5. Subordinated Debt Abandon option can add value Lecture 21: Bankruptcy-Financial Distress Investors 6. Mezzanine Investors 7. Shareholders (C/S) Old Question Math Quiz 2: Q1. EBITDA= 50 mill; Excess Cash= 20 mill; Debt= 100 mill; # Shares= 10 mill; EV/EBITDA Multiple= 8.5; Est Enterprise Value and corresponding Stock Price: 8.5*(50mil) = 425 mil = Ent Value; MVE= 425 - 100 + 20 = 345 mill; Stock Price= 345 mill/10 mill = $34.5 Q2. Firm with P/E ratio= 10 wants to take over firm half size with P/E ratio=20. P/E of merged firm: If firm A=100, then firm B=50; A= 100/P/E of 10= 10; B= 50/P/E of 25 = 2; A+B = Merged P/E of 12

Old Questions: Q1. Which of following about IRR not true: Using IRR to measure ret assumes all inc earned over horizon is reinv at cost of cap | Q2. Which stmt is false: FCF measures cash generated by firm after payments to debt or equity holders are considered | Q3. Evidence from M&A Lit says on avg: Shareholders of target firm gain, shareholder of acquiring firm lose | Q4. In M&A, firm should be acq if: +NPV to shareholders of acquiring firm | Q5. With perpetuity growth rate model, which not needed for term val: EBITDA exit multiple | Q6. When calc Unlev FCF for DCF, which not deducted from EBITDA: Interest Exp | Q7. Which not valid reason for IPO underpricing: Way to make more money for VCs who provide financing at early (pre-IPO) stages of firm’s life | Q8. Which is false concerning “lock-up” clause in IPO: None of Above | Q9. Are consulting fees included in capital budgeting system, why: No, sunk cost-Cost made regardless if project would happen or not | Q10. Only get rewarded for systematic risk. Which will affect risk premium: Risk that economy slows, reducing demand for the firm’s products | Q11. Primary diff b/e acq & pub comp mult is acq typicalls: Factors Control Prem | Q12. A WACC=10%; B WACC=8%; Same 5yr Term EBITDA= 100 mill; A Exit Mult= 10; B Exit Mult= 8. Who has higher PV of Term Val? A (Use TVM) IPOs are underpriced on avg, IPO offerings come in waves, Some IPOs Market Cap doesn’t = Shareholder Equity, Shareholder Equity is a BV, underperform in long-run - Investors who buy right after IPO receive belowShare Price doesn’t affect Shareholder Equity Lecture 23: Private Equity & LBO market returns - Companies tend to “manage” earnings before IPO Private Equity: Invest using private securities - VCs & Established Businesses - SEO: Seasoned/Secondary Equity Offering: New equity issue by already publicly PE firms are Financial buyers, not Strategic buyers, Often take on high Debt, traded firm, May involve shares sold by existing shareholders (non-dilutive), new Seen as controversial, Important for economy, Reduces Agency Problem shares (dilutive), or both - Firms improve operating performance and reported LBO: Leveraged Buyout: Taking high debt to buyout competitors earnings prior to SEOs, but improved earnings are not sustained after SEO Reverse LBO: Successful Exit creating value Real Options: GP: Manager of PE firm, Compensated by mgmt & performance fees | LP: Types: Call, Put, Real (value of flexibility to change course in future), Strategic Investor committing capital in PE fund, Receive rest of returns net of GP Fees 3 Approaches: Put-Call Parity, Binomial Option Pricing, Black Scholes Model Lecture 24: LBO Valuation & Modeling Mergers & Acquisitions: APV: Unbundle components of corporate value & analyze each separately, 2 Good M&A Reason: Shareholder Value | Bad M&E Reason: Anything not relate Sources: Operations & Financial/Leverage Maneuvers to shareholder value | Synergies: PV of net addtl CF generated by combination of Capital Budgeting: 2 companies that cannot be generated by either company on its own (Ex: Op Use FCFs not accounting earnings - Adjust for taxes, investment in NWC, etc. - Synergies: Cost Savings [Shared R&D,Shared Facilities], Improved Market Use approp discount rate: Reflect risk of proj, Doesn’t depend on financial source Access, Improved Levels of Innovation)(Ex: Financial Synergies: Access to more Capital Structure: capital, Access to less expensive capital, Ability to allocate funds to areas with In absence of taxes, info asym, and incentive probs, firm val is independent of greatest potential, Tax benefits, Diversification), = Value of Combined firm w/ capital structure & financing decisions are irrelevant - W/ Corp Taxes, firm value Synergy - Value of combined firm w/out | More likely to achieve cost synergies increases w/ D/E ratio (Personal Taxes favor equity not debt) - Information/ than growth synergies | Costs synergies are easier - Revenue syn are harder | Incentive Problems = Important factors in determining capital structure Integration is diff, but important | Risks involved in Cross-Border M&As Hostile Takeover Defenses: Stock Repurch, Poison Pill, Staggered Board, Shark Dividend Policy: No formula for optimal payout ratio - In perfect Capital Market, Dividend policy Repel, Gold Parachutes, Greenmail, Lev Recap, Mgmt Buyout, White Knight is irrelevant - Don’t forego Positive NPV Projects just to pay dividends - Avoid Bankruptcy/Financial Distress: issuing stock to pay dividends - Consider share repurchase as means of Can be difficult to raise new financing in distress w/out existing creditors forgiving some debt (“Debt Overhang”) | Debt Overhang: Existing risky debt act distributing cash - Personal Tax & Issue Costs favor low div payout as a “tax on investment” | Debt structure affects how easily debt can be Ratio Analysis: restructured: Public Bonds are more difficult to restructure than bank and Liquid Ratios: Ability to pay short-term obligations (Current & Quick) Solvency: Provide information on financial leverage & ability to meet longer-term privately placed debt bc of hold-out problem, Junior debt is easier to restructure obligations (D/E, TA/TE) | Profitability: How well generates op & net profit from bc its possible to offer more senior debt in exchange, Long-term debt is easier to Sales (Net PM, Op PM) Activity: Efficiency in utilizing various assets (TATO, Inv restructure bc its in effect junior to ST claims - Public Bonds are restructured through exchange offers: In exchange for debt forgiveness, need to offer bonds of TO) | Valuatation: For relative Valuation (P/E, P/S, EPS) higher seniority or shorter maturity (or cash) to avoid hold-out Firm Valuation: Important for corporate financial decisions that maximize value, Help understand Private Equity & LBO: APV vs WACC: If applied correctly, both give the same answer firm | Law Of One Price: In absence of trade frictions and w/ free competition APV is aesthetically a cleaner approach (unbundled the source of value and does and price flexibility, goods sold in different locations must sell by = price in not mix valuation of operations and financing | For APV, need to know debt level common currency | Equity Value: Ent Val - Debt + Cash Enterprise Value: Equity Value + Debt + Pref Stock + Min Interest - Excess Cash each year | For WACC, assume a constant D/V ratio - Use market value for D/V PE Reading: Relative Valuation: Valuing based on similar companies (P/E, EV/EBITDA, Key diff b/een PE firms corporations is that PE-run firms are highly leveraged, EV/FCF, EV/Sales, Market-to-Book, EV/Subscribers, EV/Reserves) Mix Valuation: Val early CFs explicitly, then apply a multiple for continuation val usually taking on > 70% debt. This capital structure gives them a huge advantage Absolute Valuation: Disc CFs to the firm or eq, APV (Adj PV), EVA (Economic of debt tax shields Value Added), PV of Dividends, Asset Liquidation Value, Real Options Critics = PE firms’ exploitation of tax shields and the likelihood of PE firms filing DCF: PV of expected future CFs, WACC if D/V is constant, APV if D is known bankruptcy increases due to their high debt levels DCF ADV: Reflects value of projected FCF, More insulated from market Also blamed for being disruptive in nature: new mgmt, streamline the co by aberrations (bubbles & distressed periods), Market independent to an extent, selling not so profitable units, perform across-board cuts, and substantial cultural Allows analysts to run multiple financial performance scenarios - more flexible, change in the companies that they manage Self-sufficient - Doesn’t rely entirely on comps DCF DISADV: Accuracy in future projections is challenging, Relatively small changes in key assumptions (growth, margins, WACC, exit multiple) can produce meaningfully different value ranges, Basic DCF doesn’t provide flexibility to a change in capital structure over projection period | Terminal Value: Give value of business after forecast period, Calc when company financials have stabilized, Sensitive to growth | Stand-Alone: Value of firm currently as-is | IPO: Sale of Equity to public, Stage where some private investors like VCs cash in, After IPO, equity is listed on stock exchange IPOs/SEOs: Old Question Math Quiz 1: Q1. Share Price= $85; Dividend next year= $3; Req. Return= 8%; Share price next year after Dividends and what is growth rate: For G, 85 = [ 3/ (.08-g) ].. g= 4.47%; Share Price = x, [(x - 85) + 3]/ 85 = .08.. x= $88.80 | Q2. Beta=1.197; D/E= .7; Exp Return= 16%; Treasury Yield= 8%: One-year, $1,000 par val, 7% coupon; Selling: $972.73; Tax= 34%; Cost of Debt, Cost of Equity, WACC: rd= (1,000 FV; -972.73 PV; 70 PMT; 1 N) = 10%; re= .08+(1.197*(.16-.08) = 17.58%; wd= .7/(1.7)= 41%; we= 1/1.7= 59%; WACC= .1(.41)(1-.34)+(.1758)(.59) = 13.07% | Q3. Dividend= $2; G for 3 years= 20%; G after= 7% indefinitely; Req Return= 15%; Intrinsic Value: D0= 2.00, D1= 2.40, D2= 2.88, D3= 3.46; Intrinsic Value = (2.40/1.15) + (2.88/1.152) + [3.46/(.15-.07)]/1.152 = $36.93 | POSSIBLE QUESTION: Firm announces dividends. What would happen to the Call Option Value: Go down...