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What You Should Be Able To Do

This document outlines the key concepts and skills that should be demonstrated in corporate finance including: 1) Calculating the implications of leverage on weighted average cost of capital, return on equity, and optimal capital structure. 2) Analyzing the effects of taxes on dividend payouts and investors' interpretation of payout announcements. 3) Relating levered and unlevered betas and deriving the relation between required return on equity and leverage. 4) Measuring efficiency of working capital management and evaluating short-term borrowing and credit risk policies.

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AbhishekKumar
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38 views1 page

What You Should Be Able To Do

This document outlines the key concepts and skills that should be demonstrated in corporate finance including: 1) Calculating the implications of leverage on weighted average cost of capital, return on equity, and optimal capital structure. 2) Analyzing the effects of taxes on dividend payouts and investors' interpretation of payout announcements. 3) Relating levered and unlevered betas and deriving the relation between required return on equity and leverage. 4) Measuring efficiency of working capital management and evaluating short-term borrowing and credit risk policies.

Uploaded by

AbhishekKumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

What you should be able to do

Prove MM’s proposition 1


Link equity returns to leverage with and without taxes
Demonstrate the concept of homemade leverage for various D/E ratios
Find the optimal capital structure under personal and corporate taxes
Calculate the implications of converting Equity to Debt on WACC, return on equity etc.
Identify direct and indirect costs of bankruptcy
Analyze the effects of Debt-Equity conflicts during times of distress

Give an argument against switching from existing policy to target policy using homemade dividends
Analyze the effect of taxes on dividend payouts
Analyze investors interpretation of payout announcements
Calculate the payouts according to Lintner’s model
Identify the similarities and differences between Cash dividends and repurchases
Identify the conflicts between dividend policy and financing requirements

Estimate the cost of dilution in raising new equity

Relate levered and unlevered betas


Derive the relation between required return on equity and leverage
Given the cashflows, evaluate a project under the three methods (FTE, APV, WACC)
Explain how APV takes into account the other side effects of leverage
Review the major assumptions behind the three methods

Identify the risk return tradeoffs in Short term Financial Management


Measure efficiency of Working capital management using Operating and Cash cycles
Compare different ways of short term borrowing
Evaluate credit risk policies and their effect on Accounts receivables

Calculate the Net Advantage of Leasing


Calculate the break-even lease payment
Identify the role of taxes in a lease agreement
Distinguish the tax treatments between Lease and hire purchase

Evaluate the value created from a merger deal


Derive bounds for the Exchange ratio
Quantify the effect of Mergers on EPS

Relate IRP, PPP and Intnl Fisher Effect


Perform capital budgeting with overseas cashflows, taking into account exchange rate fluctuations

Draw the position and payoff diagrams for option positions


Relate options and corporate finance decisions
Obtain the option price in a simple setting (one period binomial model) using NPV and the quick method
Quantify the difference between the valuation of warrants and Call options
Give a break-up for the price of a convertible bond

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