Finance Review
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Annuity Factor= 1/r 1/r(1+r)nEquivalent annual cost= present value of costs/annuity factorCall option gives the owner the right (no the obligation) to buy the underlying asset at a specified price. Put option gives the owner the right (not the obligation) to sell the underlying asset at a specified date for a specified price.Specified Price=exercise or strike priceSpecified Date= exercise or strike date or maturityLong position=buying the call/put optionShort position=selling the call/put optionReal Option=apartment complex, car, plantFinancial Option=another financial assetReturn on company assets rA=d/v*rD + e/v*rEM&M Irrelevance Theorem-debt policy doesn't matter-No taxes, no bankruptcy costs, investment decisions are not affected by capital structure, efficient markets, symmetric information.rE=rA + (rA-rD)D/EWACC= rA=(D/V*rD) + (E/V*rE)BA= (D/V)BD + (E/V)BEBE=BA + (BA-BD(D/E)Financial Risk-risk to shareholders resulting from the use of debtFinancial Leverage-the use of debt to increase the expected return on equityInterest Tax Shield-in the US when corporations use debt, interest paid is tax deductible. Tax shield is tax savings from deductibility of interest paymentsTax Shield=Tc * rD * DPV(Tax Shield) = TC * DFirm Value=value of all equity firm + PV(Tax Shield)Financial Distress-events preceding and including bankruptcy. It occurs when a firm breaks or does not honor its promises. Financial distress may lead to bankruptcy.MV=All Equity Firm + PV(Tax Shield) PV(Financial Distress)Firms prefer internal financing to external financing (retained earnings) If external is necessary debt is better, there is less room for difference in opinions about what debt is worth.)Equity is the least desired financing choice.After Tax WACC= D/V * rD(1-Tc) + E/V * rEAPV= NPV (100% Equity Financed) + PV(Tax Shield) + PV(Cost of Financial Distress) + PV(Other Effects)Horizontal Merger-firms operating in the same kind of businessVertical Merger-firms in different stages of operations or production; Walt Disney bought ABCConglomerate Merger-firms in unrelated businesses form a new firmLeveraged Buy Out (LBO)- purchase of the entire public stock interest of a firm through financed debt...