Corporate Finance

NPV; IRR; DPB; etc

Profitability Index: NPV + initial CFOut / Initial CF out;
NPV +ive = PI>1.0; NPV ive = PI<1.0; NPV >1.0 = accept project
Cross over rate: subtract one from the other and solve for IRR
NPV method assumes project CFs are reinvested at discount rate
IRR method assumes project CFs are reinvested at IRR
Europe uses PB more than IRR and NPV; Larger companies use NPV and IRR;
Private uses PB more than Public; Public prefers disc. CF methods. Management education = NPV/IRR
WACC = (wd) (kd(1-t)) + (wps)(kps) + (wce)(kce) ; CAPM : kce = RFR + (Rmkt RFR)
K = D / P; P = D / K-g; Kce = (d / p) + g; g = RR X ROE
Beta = systematic of mkt risk
Pure Play -> Unlever (comparable) and then Relever (said company)
asset = equity [ 1 / 1+ ((1-T) D/E)];

and then

project = asset [ 1 + ((1-T) D/E)]

Country Risk premium:

Kce = RFR + (Rmkt RFR + CRP);
CRP = sovereign yield spread x (annualized of equity of developing country index)
of sovereign bond mkt in developed country
sovereign yield spread = difference between yields of govt. bonds in developing country and T-bills)
breakpoint = amount of capital where cost of capital changes / weight of component in capital structure.

Leverage: Amount of fixed costs

Business risk -> risk associated with operating income uncertainty of sales
Sales risk-> uncertainty; Operating risk -> uncertainty of earnings caused by fixed costs
Financial risk ->

DOL = % EBIT / % sales;

answer computed = % increase in EBIT for every % inc in sales

= (EBIT / EBIT) / (Q/Q)

= Q (P-V) / Q(P-V) F;

= S TVC / S TVC FC

There is a different DOL for every level of sales; DOL is highest @ low levels of sales and declines @
higher levels.
DFL = = % EPS / % EBIT;

answer computed = increase in EPS% for every % increase in EBIT

@ particular level = EBIT / (EBIT interest);

With no fixed costs: DOL = 1; with no interest: DFL = 1
DTL: = DOL X DFL

= % EBIT / % sales X % EPS / % EBIT

= Q (P-V) / Q(P-V) F Int

= % EPS / % sales;

= S TVC / S TVC F Int

Answer computed = % increase in EPS for every % inc in sales

Leverage decreases NI but increases ROE
No Leverage = % EBIT = % ROE;
Breakeven:

Leverage = % EBIT < % ROE

Qbe =( fixed operating costs + fixed financing costs )/ price variable cost per unit

Operating BE = fixed operating costs / P VC

Declaration Date; ex-dividend date; holder-of-record date; payment

Repurchases: using debt; EPS will increase if cost of debt < yield
EPS will decrease if cost of debt > current yield
BVPS will decrease if repurchase price > original BVPS
BVPS will increase if repurchase price < original BVPS

Drags & Pulls: factors that weaken liquidity;

Drags -> delay or reduce cash inflows;

Pulls -> accelerate cash outflows

Term of 2/10 net 60 = 2% discount if paid within 10 days, otherwise due in 60 days
Cost of trade credit = [ 1 + (% discount / 1-% discount)] 365/days past discount -1