Corporate Finance Outline

Corporate Finance Outline - www.swapnotes.com CORPORATE...

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1 CORPORATE FINANCE OUTLINE Last Updated: 4/12/02 FINAL VERSION I. VALUATION A. Time Value of Money Interest is what balances out inflation. How do we figure out what interest rate to charge? 1. Cover the inflation rate to break even. 2. Opportunity cost. 3. Default/Credit risk, the risk that the guy wont pay back. Nominal Returns: Rate of interest including inflation. (the actual # you get) Real Returns : Rate of interest adjusted by taking out the inflation. Key interest rates: Discount Rate : The rate that the Federal Reserve charges the bank to borrow money over night, the banks have to meet reserve requirements. (1.25%) Fed Funds Rate: Rate that the banks charge each other to borrow $ overnight. (1.75%) Prime Rate: Rate that banks charge their most creditworthy corporate clients. (4.75%) B. Future Value How much is my $ in my hand going to be worth in the future? Variables: 1. The Money in hand now (x) 2. The point in the future/years (n) 3. The interest rate (K) n Formula: FVn = X(1+K) If we compound more than annually: n(m) FVn = X(1+k/m) m = the number of times we compound a year. www.swapnotes.com
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2 C. Present Value If you know the value in the future how much is it worth today? n PV = Xn/(1+K) Compounding: n(m) PV = Xn/(1+k/m) D. Annuity A payment stream that you receive over a period of time. PV of an Annuity: n PVa = Xn/(1+K) E. Valuation Methods 1. Balance Sheet Based Valuation Method a. Book Value = Total Assets – Total Liabilities - Does NOT consider the going concern of the corp. - Assets are conservatively stated (thus a lower valuation) b. Adjusted Book Value Method = valuating the assets at the current market value. - Problem: Doesn’t account for the going concern of the company. “The assets are usually worth more than the sum of their parts. c. Net Asset Value Method = Tries to determine what it would cost to duplicate the company. This factors in “good will”. The way to do this is to use a benchmark; a similar company i. Market/Book Ratio = Mkt Price per share/ Book Value per share NOTE: To find a similar company you can look at its Gross Revenue. To Find the BV/Share, We do “Assets – Liability/# outstanding Shares www.swapnotes.com
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3 2. Income Statement Valuations EPS = Gross Revenue [$ made] Net Income (Taxes) NIAT / Outstanding Shares = EPS [Earnings per share] a. Capitalization Earning Method Normalized Earnings = averaged earnings of company over the past 5 years. You can use any EPS you want, try to use the highest for your client. FORMULA: Ve = EPS/Risk rate R = Capitalization Rate [Risk Rate]; The riskier the company, the higher the rate. . b. P/E Ratio Valuation Method P/E Ratio = Price per share/Earnings per share. This is the reciprocal of the Capitalization method.
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Corporate Finance Outline - www.swapnotes.com CORPORATE...

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