Corporate Finance

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 Mind Map
Corporate Finance

Corporate Business
Corporote ESG
Structures and Models and
governance Integration
Ownership Risk

Business structures refer to how businesses are set up legally and organizationally.

A limited partnership A corporation is a

An individual owns A partnership agreement separate legal entity
in a general partnership has one or more
and operates a sole general partners who from its owners and
proprietorship. specifies each partner's managers. Every
operational manage the business
Profits are taxed and have unlimited owner has limited
as personal income responsibilities and claims liability. In some
on the partnership's net liability, as well as
for the owner, and multiple limited countries, dividends
the owner has the assets. Profits are taxed are subject to double
as personal income and partners with limited
sole residual claim liability. Profits are taxation (corporate tax
on the business's partners have unlimited and personal income
liability. taxed as personal
net assets. income to all partners. tax).

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 Mind Map
Corporate Finance

Corporate Business
Corporote ESG
Structures and Models and
governance Integration
Ownership Risk

Factors affecting stakeholder

relationships with corporate Agency relationship Elections to the board
governance

Market factors like ▪ Audit committee

shareholder engagement,
shareholder activism,
competition and takeovers
Non market factors like legal
environment, the media and
corporate governance
industry
▪ Managers and ▪ Nominating committee
Shareholders ▪ Compensation committee
▪ Directors and ▪ Governance committee
Shareholders ▪ Risk committee
▪ Investment committee

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 Mind Map
Corporate Finance

Corporate Business
Corporote ESG
Structures and Models and
governance Integration
Ownership Risk

Methods for incorporating

ESG concerns or factors
into portfolio construction
include:
• Negative screening.
• Positive screening.
• Relative/best-in-class
investing.
• Full integration.
• Thematic investing.
• Engagement/active
ownership.
• Impact investing.

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 Mind Map
Corporate Finance

Corporate Business
Corporote ESG
Structures and Models and
governance Integration
Ownership Risk

Macro risk is caused by economic, political,

A business model should legal, regulatory, and demographic changes
identify a company's potential that affect all businesses in a country or
customers, describe its The overall risk of region.
products or services and a firm influences
explain how it intends to sell the cost and Firm-specific risk factors include
them, list its key assets and availability of competitive, execution, product market,
suppliers, and explain its capital and is capital investment, and ESG risks. Industry
pricing strategy.The value determined by its risk factors include cyclicality, industry
proposition describes how a business model, as structure, competitive intensity and
company's customers will value well as firm-specific dynamics, and long-term growth
the features of its product or and external risk expectations.
service. The value chain factors.
describes how a company Business risk is the variability of operating
executes its value proposition. income caused by macroeconomic, industry,
and firm-specific factors, which is amplified
by operating leverage.

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 Mind Map
Corporate Finance

Corporate Business
Corporote ESG
Structures and Models and
governance Integration
Ownership Risk

▪ Primary Sources –
Cash & bank Accounts Receivable
balance, trade Steps in Management of Accounts Receivable:
credits, Liquidity ratios: ▪ Granting credit and processing transactions
decentralised ▪ Current ratio = Current Assets ▪ Monitoring credit balances
cash flows etc. Current Liabilities ▪ Measuring performance of the credit function
Business ▪ Secondary ▪ Quick ratio = Quick Assets ▪ Float factor is the amount of money which is in transit to the
structures refer to Sources – Long Current Liabilities company.
how businesses term liability, ▪ Cash Ratio = Cash and marketable securities ▪ Float factor = Average daily float
are set up legally liquidation of Current Liabilities Average daily deposit
and short/long term Turnover ratios: Inventory
organizationally. asset etc. ▪ Receivable Turnover= Credit Sales Approaches to manage inventory:
Factors that reduce Average Debtors ▪ Economic Order Quantity (EOQ) – Reorder point - requires
liquidity position: ▪ Inventory Turnover= Cost of Goods Sold/Sales determining the level of inventory at which new inventory is
▪ Drags – includes Average Stock ordered.
uncollected ▪ Payable Turnover = Credit Purchase
receivables, Average Creditors
obsolete Operating Cycle: ▪ Just in time (JIT) - minimizes ‘in-process inventory stock’ by
inventory, tight Operating Cycle = Inventory holding period + ordering a only at the last moment.
credit receivable collection period Accounts Payable
▪ Pulls – low Cash Conversion Cycle: ▪ Amounts due to suppliers and services that have not been paid.
liquidity position, Inventory holding period + receivable collection ▪ Trade credit involves delayed payment with a discount for early
limits on short period – Creditors payment period payment. 2/10, net 30 indicates that a 2% discount is available
term lines of if the account is paid within 10 days. Otherwise full amount
credit, reduced is due in 30 days.
credit limit
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 Mind Map
Corporate Finance

Weighted Cost of Extended

Cost of Equity Capital Working Capital
Average Preference DuPont
Capital Budgeting Mgmt
Cost of Capital Stock Expression

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 Mind Map
Corporate Finance

Weighted Cost of Extended

Cost of Equity Capital Working Capital Measure of
Average Preference DuPont
Capital Budgeting Mgmt Leverage
Cost of Capital Stock Expression

WACC=(wd)*kd*(1-t) + wpskps+ weke

Cost of Equity using CAPM: ke=Rf+ β*(Rmkt - Rf)

Q:
Tax rate 35%, before tax cost of debt:6.5%,
Capital Structure is 50:50 Cost of equity: 10.55%
Ans:
WACC = (0.5)*6.5%*(1-0.35) + 0.5*10.55 WACC
= 7.4%
10 yrs AAA rated bond 8.5% Expected market return 20%
Beta of market 1.0 Debt/equity ratio 0.8
1 yr market returns 12% Credit spread (BB bond) 2.17%
Credit rating of XYZ BB 10 yrs Govt. Bond 7.33%
Beta of a stock XYZ 1.2 Tax rate 40%
Expected dividend $5 Dividends growth 10%

Q: Q: Q:
Calculate the weighted average cost of capital Which of the following will be a fair market price of stock Which of the following is most likely to be true, if
using above information? according to Gordon's formula? there are no outstanding convertible securities?
A. 15% A. $25 ▪ EPS <= Diluted EPS
B. 17.5% B. $40 ▪ EPS => Diluted EPS
C. 20% C. $30 ▪ EPS = Diluted EPS
Ans: Ans:
15% Ans: $40 EPS = Diluted EPS

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 Mind Map
Corporate Finance

Weighted Cost of Extended

Cost of Equity Capital Working Capital Measure of
Average Preference DuPont
Capital Budgeting Mgmt Leverage
Cost of Capital Stock Expression

KP = DPS/P

Q:
Preference dividend = $2,
Price of preference share =$20
Ans:
Kp= 2/20 = 10%

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 Mind Map
Corporate Finance

Weighted Cost of Extended

Cost of Equity Capital Working Capital Corporate
Average Preference DuPont
Capital Budgeting Mgmt Governance
Cost of Capital Stock Expression

Ke= (D1/P0) + g or Ke= Rf + β*(Rmkt - Rf + CRP)

Country risk premium (CRP) = Sovereign yield

spread * (σ of developing country equity index / σ of βlevered= βunlevered * (1 + debt/equity)
developed country sovereign bond)

Q: Q:
If the difference between the yields of Govt. of India A company has been paying a dividend of $ 15 for
bonds denominated in Rupee and the treasury each stock held. What shall be the stock price of
bonds of USA having same maturity, increases. the company if this dividend is expected to be
What will be the effect on the cost of equity of a firm received till infinity and expected rate of return by
in India? the investor is 10%?
Ans: A. $15
Increases B. $150
C. $100
Ans:
P0 = 15 / 10% = $150

Q:
Stock is quoting at $20, expected dividend is $2,
Growth rate = 5%
Ans:
Cost of equity = 2/20 + 5% = 15%

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 Mind Map
Corporate Finance

Weighted Cost of Extended

Cost of Equity Capital Working Capital Measure of
Average Preference DuPont
Capital Budgeting Mgmt Leverage
Cost of Capital Stock Expression

NPV & IRR Payback period Profitability index

NPV = CF0+ [CF1/(1+k)]
+ [CF2/(1+k)2]+….+[CFn/
/(1+k)n]
IRR: Discount rate that
makes
NPV equal to 0.
Treatment of
Payback period is Floatation Costs: PI = 1 + NPV/CF0
number of years it takes ▪ Increase in Initial
to recover initial project Cost of Project If PI > 0, accept project
cost (Preferred) If PI < 0, reject project
▪ Incorporate Floatation
Costs in discount rate Avg. Accounting Rate of
Discount payback uses (not Preferred) return (AAR)
present values of cash AAR = Avg. NI / Avg.
flows BV

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 Mind Map
Corporate Finance

Weighted Cost of Extended

Cost of Equity Capital Working Capital Measure of
Average Preference DuPont
Capital Budgeting Mgmt Leverage
Cost of Capital Stock Expression

Comparison of firm’s Management of Cash

Types of Capital Liquidity
liquidity with peers Flow
▪ Primary Sources –
▪ Fixed/Permanen Cash & bank Accounts Receivable
t Capital balance, trade Steps in Management of Accounts Receivable:
▪ Working Capital credits, Liquidity ratios: ▪ Granting credit and processing transactions
= Current Assets decentralised ▪ Current ratio = Current Assets ▪ Monitoring credit balances
– Current cash flows etc. Current Liabilities ▪ Measuring performance of the credit function
Liabilities ▪ Secondary ▪ Quick ratio = Quick Assets ▪ Float factor is the amount of money which is in transit to the
Different elements Sources – Long Current Liabilities company.
of working capital: term liability, ▪ Cash Ratio = Cash and marketable securities ▪ Float factor = Average daily float
▪ Current Assets – liquidation of Current Liabilities Average daily deposit
Cash, Account short/long term Turnover ratios: Inventory
Receivable, asset etc. ▪ Receivable Turnover= Credit Sales Approaches to manage inventory:
Inventory Factors that reduce Average Debtors ▪ Economic Order Quantity (EOQ) – Reorder point - requires
▪ Current liquidity position: ▪ Inventory Turnover= Cost of Goods Sold/Sales determining the level of inventory at which new inventory is
Liabilities – ▪ Drags – includes Average Stock ordered.
Accounts uncollected ▪ Payable Turnover = Credit Purchase
Payable receivables, Average Creditors
obsolete Operating Cycle: ▪ Just in time (JIT) - minimizes ‘in-process inventory stock’ by
inventory, tight Operating Cycle = Inventory holding period + ordering a only at the last moment.
credit receivable collection period Accounts Payable
▪ Pulls – low Cash Conversion Cycle: ▪ Amounts due to suppliers and services that have not been paid.
liquidity position, Inventory holding period + receivable collection ▪ Trade credit involves delayed payment with a discount for early
limits on short period – Creditors payment period payment. 2/10, net 30 indicates that a 2% discount is available
term lines of if the account is paid within 10 days. Otherwise full amount
credit, reduced is due in 30 days.
credit limit
© EduPristine For [CFA-I Corporate Finance-MM] (Confidential) 12
 Mind Map
Corporate Finance

Weighted Cost of Extended

Cost of Equity Capital Working Capital Measure of
Average Preference DuPont
Capital Budgeting Mgmt Leverage
Cost of Capital Stock Expression

ROE= [O/P Income/Revenue] * [PBT/ (O/p Income)] *

[PAT/PBT] * [Revenue / avg. total assets] * [avg. total assets/ avg. equity]

2010 2011 2012

Operating Margin 78% 78% 78%

Effects of Non-Operating Items 0.80 0.77 0.72

Tax Effect 0.65 0.65 0.65

Total Asset Turnover Ratio 0.20 0.19 0.18

Financial Leverage 2.50 2.86 3.37

ROE 20% 21% 22%

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 Mind Map
Corporate Finance

Weighted Cost of Extended

Cost of Equity Capital Working Capital Measure of
Average Preference DuPont
Capital Budgeting Mgmt Leverage
Cost of Capital Stock Expression

Leverage is present because of:

▪ Fixed Operating Costs
▪ Use of Debt in capital structure z

▪ Degree of Operating
▪ Breakeven:
Leverage:
When Profit = 0 and
Revenue = Costs

▪ Breakeven Points:
▪ Degree of Financial
Leverage:

▪ Operating Break Even:

▪ Degree of Total
Leverage = DOL * DFL

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