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Corporate Finance: Valuation & Capital

1. Corporate finance covers valuation, cost of capital, capital budgeting, capital structure, financing, dividends, and working capital management. 2. Valuation techniques include discounted cash flow models for perpetual and finite cash flows as well as contingent claims valuation using binomial and Black-Scholes models. 3. Capital budgeting projects are evaluated using net present value and internal rate of return, considering mutually exclusive projects and real options.

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167 views18 pages

Corporate Finance: Valuation & Capital

1. Corporate finance covers valuation, cost of capital, capital budgeting, capital structure, financing, dividends, and working capital management. 2. Valuation techniques include discounted cash flow models for perpetual and finite cash flows as well as contingent claims valuation using binomial and Black-Scholes models. 3. Capital budgeting projects are evaluated using net present value and internal rate of return, considering mutually exclusive projects and real options.

Uploaded by

gudun
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Corporate Finance

Everything…..
R Srinivasan
Corporate Finance
• Valuation and Cost of capital
• Capital budgeting
• Capital structure, financing and dividend
policy
• Working capital
Valuation
• Generalised valuation
Arbitrage and value additivity
• Patterns
Level perpetuity
Growing perpetuity
Level annuity
Growing finite cash flow
Valuation
Growing finite [t years] cash flow

C1/(r-g){1-(1+g)t/(1+r)t}
Valuation
• Compounding intervals (1+r/m)m-1
Continuous compounding
• Stated and effective rates
• Nominal and real rates
1+rnominal=(1+rreal)(1+inflation rate)
Valuation: Straight Bonds
• YTM
• Duration
Sensitivity of value to changes in interest
rates
[1*PV(C1)/V]+[2*PV(C2)/V]+[3*PV(C3)/V]
V/V = (1+r)/(1+r)*D
Valuation: Common Stock
• Perpetual growth models
Sustainable growth
P0=No-Growth +PVGO
No-growth =EPS1/r
PVGO=NPV1/(r-g)
where NPV1 =-INV1 +INV1*ROE/r
g=Ploughback*ROE
EPS1/P0 interpretation
Valuation
• Multiple stages
Supernormal stage plus PV of normal
growth
• Free cash flow
NOI approach
Cost of Capital
• Security return and standard deviation
• Portfolio return and standard deviation
• Diversification Portfolio variance=
1/N Average Var+(N-1)/N Average covariance
• Systematic and unsystematic risk
• CAPM
• Opportunity cost of capital r [rA]and
Adjusted cost of capital r*
Cost of Capital
1. VL = VU +Tc *D
2. WACC = D/V * (1-Tc) * rD+E/V * rE [Definition of WACC]
3. rE = rA + (rA - rD ) * (1- Tc) * D/E [MM Proposition II]
4. β E = {1+ (1- Tc) * D/E} *β A [If debt is risk free]
5. rE = rf + (rM - rf) *β E [CAPM]
6. WACC= rA *(1- Tc * D/V) MM
Valuation
• Contingent cash flow
Call/Put
American/European
Binomial
Black-Scholes
Underlying asset price, Exercise Price, Risk-
free rate, Volatility, Time
Capital Budgeting
• NPV and IRR not payback and accounting
rate of return
• Accept/reject single project use NPV or
IRR, unless no/multiple IRR
• Mutually exclusive projects: Same life and
risk
Use NPV [or IRR of difference between
projects]
Capital Budgeting
• Mutually exclusive projects: Different lives same
risk
Use NPV-assumes replacement projects have zero
NPV. OK for projects with long lives
Use NPV-with specific replacements that make
project with comparable lives
Use replacement chain or EAC
Care: Use only real cash flows for EAC
Capital Budgeting
• Incremental nominal cash flows with
empirically measured discount rate
• Components of cash flow
Investment in fixed assets, salvage value
Investment in working capital, release
Operating revenues/expenses
NO INTEREST
Capital Budgeting
• NPV assumes “now or never”
• Real Option framework
Abandonment
Follow-up
Wait and learn
Flexibility
Capital structure
• Market Efficiency
• MM-1 No taxes
• MM-2 Corporate taxes
• Miller Both corporate and personal taxes
GL= {1-(1-TC)*(1-TpE)/(1-Tp)}
• Bankruptcy costs
• Agency costs
Dividends
• MM Does not matter
• Lintner behavioural model
DIV1-DIV0=Adjustment rate*(target ratio*EPS1-DIV0)
• Agency costs/signalling
Working Capital Management
• Operating cycle, cash conversion cycle,
weighted cycles and supply chain
management
• Investment in receivables
• Cash management
EOQ and Miller-Orr models

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