FINS5514 corporate finance 考点知识总结

1. Agency Theory

Jensen & Meckling (1976) state that the firm is a nexus of contracts ? All stakeholders of the firm are concerned only with self-interest

? This creates conflicts of interest between: – Shareholders and managers – Shareholders and debtholders

? Managers prefer to: ? Increase their job security ? Increase their own power and status ? Consume excessive perquisites

? They may do this at the expense of SWM

? Shareholders know this, and therefore attempt to protect against it by: ? Linking managerial salaries to firm performance ? Limit the free cash flows under managerial discretion ?Monitor managers through, for example, audits or tighter shareholder concentration

? All of the activities of shareholders to decrease agency conflicts occur at a cost, called, agency costs. ? Changes in policy ? Opportunity costs if managers unable to invest in positive NPV projects ? Monitoring costs

2. Investment Criteria

? Net Present Value ? The Payback Rule

? The Discounted Payback

? The Average Accounting Return ? The Internal Rate of Return ? The Profitability Index

? The Practice of Capital Budgeting

We need to ask the following questions: ? Does the decision rule adjust for the time value of money? ? Does the decision rule adjust for risk? ? Does the decision rule provide information on whether we are creating value for the firm?

3. What-if Analysis

? Scenario Analysis: determination of what happens to NPV when we ask what-if analysis. Best, base, worst case.

? Sensitivity Analysis: investigation of what happens to NPV when only one variable is changed. ? Simulation Analysis: a combination of scenario and sensitivity analysis.

4. DGM, CAPM and WACC

5. Types of Underwriting

? Firm Commitment Underwriting

? Issuer sells entire issue to underwriting syndicate ? The syndicate then resells the issue to the public

? The underwriter makes money on the spread between the price paid to the issuer and the price

received from investors when the stock is sold

? The syndicate bears the risk of not being able to sell the entire issue for more than the cost ? Most common type of underwriting in the United States

? Best Efforts Underwriting

? Underwriter must make their “best effort” to sell the securities at an agreed-upon offering price ? The company bears the risk of the issue not being sold

? The offer may be pulled if there is not enough interest at the offer price and the company does not

get the capital and they have still incurred substantial flotation costs ? Not as common as it used to be

? Dutch Auction Underwriting

? Underwriter accepts a series of bids that include number of shares and price per share ? The price that everyone pays is the highest price that will result in all shares being sold

? There is an incentive to bid high to make sure you get in on the auction but knowing that you will

probably pay a lower price than you bid

? The Treasury has used Dutch auctions for years ? Google was the first large Dutch auction IPO

6. M&M Theory, Pecking-Order Theory, Static Trade-off theory

Pecking-Order Theory: ? Many, if not most, large profitable firms such as Google and Microsoft use very little, if any, debt ? The higher the market valuation, generally the less the debt ? Raising capital is expensive

? Successful firms do not have to resort to external sources of finance-use internally generated cash ? If stock is overvalued, management will prefer to issue new equity ? Anticipating this, prospective new shareholders will downgrade the stock and price will fall ? Pecking order: retained earnings first; external debt second; external equity, last resort ? Implications: No target capital structure Profitable companies use less debt Companies try to create financial slack

Static Trade-off theory:

It is the theory that a firm borrows up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress. We call this the static theory because it assumes that the firm is fixed in terms of its assets and operations and it considers only possible changes in the debt-equity ratio.

7. The saying is “a bird in the hand is worth two in the bush”, that is, a cash dividend in the hand is worth more than the promise of higher dividends in the future if the firm uses excessive retained cash to make negative NPV investments (i.e., essentially to “steal” shareholder income). Under M&M this is assumed not to happen, but it does in reality. If the retained cash yields the firm’s cost of capital then the “two in the bush” pays-off and M&M goes through.

8. The “clientele effect” refers to the tendency under the “classical” tax system in use in the US for investors subject to high personal tax on dividends to prefer to hold companies that retain the majority of their income and generate more lightly taxed realized capital gains when the stock is sold. Investors in a more

tax-advantageous position would prefer to hold more relatively high dividend paying stock. If an individual company switches its dividend policy from high to low, it may reallocate itself from one clientele to another but not have a significant effect on the overall supply of dividends to that clientele. In which case, its change in policy will have no effect on its valuation.

9. “Dividend signaling” refers to the idea that it will be costly to management (and shareholders) if a

company announces a high payout (dividend) policy and then in future has to reverse this policy because the firm cannot generate enough cash. If this is true, the firm may be able to credibly signal improved earnings prospects by raising its dividend. Dividend signaling may not be very credible because if the firm discovers it has far more positive NPV projects than expected, it may need to limit its dividends in order to finance its now better prospects.

10. Dividend policy: residual dividend approach, dividend stability, compromise dividend policy

11. DIVIDEND IMPUTATION和classic tax system

1.AGENCY COST，产生的原因和怎么解决 2.NPV,IRR,PAYBACK PERIOD, AAP,PI好处不好处 3.DGM, CAPM, WACC的好处不好处

4.MM定律，结合后面的PECKING ORDER，static trade-off theory, bird-in-hand theory, singnaling theory 5. Three types of what-if analyses

6.procedure of selling securities to public 7. types of underwriting

8.DIVIDEND IMPUTATION和普通分红的区别

9. Dividend policy: residual dividend approach, dividend stability, compromise dividend policy 10.clientele effect, green shoe, lockup

Calculation

1.levered cost of capital (EPS, value of the firm, cost of capital, unlevered cost of capital) 2. NPV(choose one; replacement problem) 3.merger 4. annuity

5.WACC (floatation costs)

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