Three approaches to valuing a firms shares/equity:
PV of dividends (or PV of total payouts to shareholders)
Multiples based on comparable firms (comps)
PV of FCFs, adjusting for the value of (net) debt
Each approach ha
Valuing a bond is no different than valuing projects and
1. Forecast bonds cash flows
2. Apply discount rate according to the bonds (systematic) risk
We often quote bonds in yields instead of prices:
= PV(Promised p
THE COST OF CAPITAL
AND ASSET BETAS
Risk, Asset Pricing, and Discount Rates
Discount rate r = rf + risk premium
For what types of risk do investors get a risk premium?
Financial markets reward investors for taking on risk that is
correlated with the st
Capital Budgeting: Process of analyzing investment
opportunities and deciding which ones to accept
Tool: the NPV rule
But to use NPV, we need cash flows and discount rates
for a project!
Today: Cash flows
Key concepts from
Goal: Quick overview of financial statement concepts that are
most important for corporate finance
e.g., projecting cash flows
Begins with financial statement data
AGENCY COSTS AND ASYMMETRIC INFORMATION
Capital structure so far
Perfect Capital Markets Assumptions:
If perfect capital markets, capital structure doesnt matter!
Then we considered tax benefit of debt vs. financial distress
CAPITAL STRUCTURE WITH TAXES AND
COSTS OF FINANCIAL DISTRESS
Today, we demonstrate how leverage can affect firm
1. The tax benefit of debt, and
2. Costs of financial distress (CFD)
Show how the optimal mix of debt and equity trade
IN PERFECT CAPITAL MARKETS
Why dont banks offer equity for financing homes?
Why do some firms have a lot of debt and other firms
almost no debt at all?
When financing a project/firm, you must decide:
1. How much to rai
i) how much, and
ii) in what form to distribute cash flows to shareholders
Trends in Payout Policy
Most firms engage in some type of payout to shareholders;
either using dividends, repurchases, or both
Share repurchases have
MERGERS & ACQUISITIONS
How does the market react to M&A deals?
Why do firms merge?
How targets defend themselves against mergers
M&A market is large and highly active
Around 4% of public firms taken over each year
Around $1 trilli