Principles Of Corporate Finance at Hochschule Reutlingen | Flashcards & Summaries

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TESTE DEIN WISSEN

Which financial goals do companies have?

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TESTE DEIN WISSEN
  1. Profit 
  2. Liquidity
  3. Stability/ Risk optimization
  4. Use of earnings
  5. Value 
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TESTE DEIN WISSEN

What are sources of funding and the related requirements 

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TESTE DEIN WISSEN
  • The standardised and non-standardised financial markets, i.e. financial intermediaries or  private investors. 
  • We need to meet their expectations e.g. regarding the return of their capital at a given risk and the repayment.
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TESTE DEIN WISSEN

Why do managers or other stakeholders not necessarily maximize shareholder wealth?

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TESTE DEIN WISSEN


  • Managers, act as agents for shareholders, BUT they may act in their own interests rather than maximizing value
  • “Agency Problems” arise= conflict of interest between management and owners
  • Managers have better information than shareholders and other investors
  • -> Corporate Governance required – “Agency cost”
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TESTE DEIN WISSEN

What is the role of Operating and Financial leverage for the WACC?

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TESTE DEIN WISSEN


  • high leverage increases the risk for investors -> higher return expectations 
  • Operating leverage: greater volatility of operating returns 
  • Financial leverage: higher risk of financial distress
  • they both matter for WACC: reflected in Cost of Debt and Cost of Equity
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TESTE DEIN WISSEN

What is the ultimate company risk?

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TESTE DEIN WISSEN
  • Financial default/ Bankruptcy 
  • it leads to loss of independency and to significant destruction of value up to total loss of investors' capital 
Lösung ausblenden
TESTE DEIN WISSEN

Causes of Bankruptcy/ Illiquidity

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TESTE DEIN WISSEN
  • Illiquidity: The company is unable or will with high probability be unable to fulfill obligations due to lack of cash 
  • Overindebtness: Liabilities exceed the value of assets -> negative equity
  • Ultimate consequence: Duty to file for insolvency
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TESTE DEIN WISSEN

Pro and Cons of Static PB

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TESTE DEIN WISSEN

Pro:

  • Simple Method 
  • CF over time taken into consideration 
  • Focus on repayment and liquidity

Con

  • Ignores time structure of CFs within and after PB period 
  • Neglects time value of money


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TESTE DEIN WISSEN

Why is money worth less in the future than now?

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TESTE DEIN WISSEN

                          

  • Impatience to consume: Individuals generally prefer £1.00 today rather than £1.00 in five years’ time.  
  • Inflation: purchasing power (their ability to buy) reduces. 
  • Risk: The promise of the receipt of a sum of money in the future carries risk; the pay-out may not take place or the future amount may be less than expected. Risk simply means that the future return has a variety of possible values.                   
  • (Buch)         


  •                         

                                                           

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TESTE DEIN WISSEN

What is the Interpretation of the NPV?

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TESTE DEIN WISSEN

NPV represents the amount that is generated by an investment over and above its opportunity cost of capital (not profit!); interpretation is independent from the lifetime of the investment                                                

           

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TESTE DEIN WISSEN

Purpose of capital budgeting

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TESTE DEIN WISSEN

It looks at the allocation of limited investment budgets to several non-exclusive investment alternatives in order to maximize the value                                                                                                    

           

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TESTE DEIN WISSEN

On what do expected returns depend? (risk/ two factors)

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TESTE DEIN WISSEN
  1. Compensation for the time value of money 
  2. A risk premium depending on the overall market risk and individual risk of an investment 
Lösung ausblenden
TESTE DEIN WISSEN

What is the Diversification Effect? 

Lösung anzeigen
TESTE DEIN WISSEN
  • If correlation between two or more assets is different from 1 -> diversification effect
  • you can reach a certain return at a lower overall risk 
  • or, reach higher returns at same risk level 
  • Combining Assets into portfolios can reduce risk of the portfolio vs an individual asset risk at an increased return 
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Q:

Which financial goals do companies have?

A:
  1. Profit 
  2. Liquidity
  3. Stability/ Risk optimization
  4. Use of earnings
  5. Value 
Q:

What are sources of funding and the related requirements 

A:
  • The standardised and non-standardised financial markets, i.e. financial intermediaries or  private investors. 
  • We need to meet their expectations e.g. regarding the return of their capital at a given risk and the repayment.
Q:

Why do managers or other stakeholders not necessarily maximize shareholder wealth?

A:


  • Managers, act as agents for shareholders, BUT they may act in their own interests rather than maximizing value
  • “Agency Problems” arise= conflict of interest between management and owners
  • Managers have better information than shareholders and other investors
  • -> Corporate Governance required – “Agency cost”
Q:

What is the role of Operating and Financial leverage for the WACC?

A:


  • high leverage increases the risk for investors -> higher return expectations 
  • Operating leverage: greater volatility of operating returns 
  • Financial leverage: higher risk of financial distress
  • they both matter for WACC: reflected in Cost of Debt and Cost of Equity
Q:

What is the ultimate company risk?

A:
  • Financial default/ Bankruptcy 
  • it leads to loss of independency and to significant destruction of value up to total loss of investors' capital 
Mehr Karteikarten anzeigen
Q:

Causes of Bankruptcy/ Illiquidity

A:
  • Illiquidity: The company is unable or will with high probability be unable to fulfill obligations due to lack of cash 
  • Overindebtness: Liabilities exceed the value of assets -> negative equity
  • Ultimate consequence: Duty to file for insolvency
Q:

Pro and Cons of Static PB

A:

Pro:

  • Simple Method 
  • CF over time taken into consideration 
  • Focus on repayment and liquidity

Con

  • Ignores time structure of CFs within and after PB period 
  • Neglects time value of money


Q:

Why is money worth less in the future than now?

A:

                          

  • Impatience to consume: Individuals generally prefer £1.00 today rather than £1.00 in five years’ time.  
  • Inflation: purchasing power (their ability to buy) reduces. 
  • Risk: The promise of the receipt of a sum of money in the future carries risk; the pay-out may not take place or the future amount may be less than expected. Risk simply means that the future return has a variety of possible values.                   
  • (Buch)         


  •                         

                                                           

Q:

What is the Interpretation of the NPV?

A:

NPV represents the amount that is generated by an investment over and above its opportunity cost of capital (not profit!); interpretation is independent from the lifetime of the investment                                                

           

Q:

Purpose of capital budgeting

A:

It looks at the allocation of limited investment budgets to several non-exclusive investment alternatives in order to maximize the value                                                                                                    

           

Q:

On what do expected returns depend? (risk/ two factors)

A:
  1. Compensation for the time value of money 
  2. A risk premium depending on the overall market risk and individual risk of an investment 
Q:

What is the Diversification Effect? 

A:
  • If correlation between two or more assets is different from 1 -> diversification effect
  • you can reach a certain return at a lower overall risk 
  • or, reach higher returns at same risk level 
  • Combining Assets into portfolios can reduce risk of the portfolio vs an individual asset risk at an increased return 
Principles of Corporate Finance

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