12-2.
Suppose the market portfolio has an expected return of 10% and a volatility of 20%, while
Microsofts stock has a volatility of 30%.
a.
b.
WhatwouldvebrfMicsqtyoaplbeu10%?
a.
No, volatility includes diversifiable risk, and so it cannot be used to ass
CORPORATE FINANCE LECTURE 1
Google and General Motors Example
Google
General Motors
$millions
Long Term Debt
Short Term Debt
Share Price
Total Assets
Total Liabilities
Cash
Short Term Investments
Shares Outstanding
Net Income
0
3,465
633.2
57,851
11,610
1
Feedback from Section 1 this morning suggested that the two least clear concepts today were
1. The difference between total risk and systematic risk
2. How is beta estimated? What does the Cisco/S&P 500 graph mean
We have only started talking about beta e
Key Concepts from Lecture 8
1. The main benefit of debt is the interest tax deductibility which reduces the effective cost of
debt
2. The value of the tax benefit of debt is calculated as the present value of the stream of
future interest tax shields
3. T
Key Concepts from Lecture 9
1. Free Cash Flow to the Firm (FCFF) is operating cash flow free to distribute to all
stakeholders of the firm after the firms reinvestment needs and operating expenses have
been met.
2. The Change in working capital used in th
6F117
CORPORATE FINANCE
AMRITA NAIN
FORMULA SHEET
1. Unlevered cost of capital or pre-
tax WACC is written as
!
!
! = ! ! + ! !
The same formula can be rewritten as
rE = rU +
2. In the pres
Key Concepts from Lecture 9 and 10
1. According to the WACC (weighted average cost of capital) method, levered enterprise
value is calculated as the present value of future free cash flows to the firm using WACC
as the discount rate
2. In the WACC method
P ERMNO
DAT E
COMPANY NAME
T ICKER
19502 20070131 WALGREEN CO
WAG
19502 20070228 WALGREEN CO
WAG
19502 20070330 WALGREEN CO
WAG
19502 20070430 WALGREEN CO
WAG
19502 20070531 WALGREEN CO
WAG
19502 20070629 WALGREEN CO
WAG
19502 20070731 WALGREEN CO
WAG
195
Key Concepts for Mini Test on Feb 23
1. A firms unlevered cost of capital or asset cost of capital is independent of the tax benefits of
debt and is equal to
2. A firms unlevered beta or asset beta is written as
3. The firms levered or equity beta capture
LECTURE 4: MORE EXAMPLES
Example 4
You need to estimate the cost of equity of a large manufacturing company for which you
require a beta. The firms beta available via Bloomberg is 1.2. This beta is estimated
using monthly returns over the previous 5 years
Key Concepts For Mini-Test on Thursday, February 9
Please make sure you understand and remember these key concepts. They will definitely
help you during my exams and in future Finance courses
Note: Next week, the short test will be on Thursday and not Tue
Market Leverage
Market-to-Book
PE Ratio
Current Ratio
Gross Margin
Operating Margin
Net Profit Margin
Return on Equity
Revenue Growth
2011
2010
2009
Walmart Target
Lowes
Best Buy Costco Home Depot McDonalds Walgreens
0.2252
0.44
0.193
0.23
0.18
0.1325
0.1
6F117
CORPORATE FINANCE
AMRITA NAIN
FORMULA SHEET
1. Market D/E ratio = Book Value of Debt/ Market Value of equity
2.
3.
4.
Gross M arg in =
Gross Profit
Sales
Operating M arg in =
Operating Income
Sales
Net Profit Margin =
Net Income
Total Sales
5. Retur
Free Cash Flow Can Also be
Calculated as
FCF =
EBIT * (1-T)
+ Increase in non-interest bearing current liabilities
- Increase in non-cash current assets
- Capital Expenditures
+ Depreciation
FCF =
Profit After Tax
+ Increase in non-interest bearing curren
CORPORATE FINANCE
GROUP PROJECT: PART III
AMRITA NAIN
DUE DATE: APRIL 26, 2012 BEFORE THE START OF LECTURE
We will work on this project in class on April 19th. Please DO NOT skip project-work lectures
This is the last part of your project. Please submit a
Concept Sheet for Lecture 6
Proposition I of Modigliani and Miller
(i) In perfect capital markets total value of a firm is equal to present value of total
cash flows generated by its assets
(ii) and the total value of the firm is not affected by leverage
CORPORATE FINANCE
ASSIGNMENT 2
AMRITA NAIN
Group Project: Part II
(Due date: March 29, 2012)
The objective of this assignment is to estimate a cost of capital for your firm. I will provide the
historical data you need for estimating beta. Please present y
PLEASE LEARN THE FOLLOWING 5 FORMULAS / CONCEPTS FOR THE
FORMULA FUN SESSION ON JAN 24
Since this is the first game, the odds are in your favor. If 50% of the class scores 100% on the
test, the class earns 1 point. Remember each point is worth one formula
Practice Problems for Lecture 8 (Debt and Taxes)
1. Raythen Inc. currently has no debt. It is planning on taking on leverage that will result in
a $50 million interest payment each year for the next 15 years. After 15 years, Raythen
will repay all of its
Example 4
Beta available from Bloomberg is no longer relevant because the firm's leverage has changed.
Beta is estimated using stock returns over the previous five years and, therefore, reflects past leverage
Recall from Lecture 4 that levered beta is equ
LECTURE 4 EXAMPLES
Example 1: Cost of Capital
You are the CFO of a privately owned software business and are considering investing in
a new product. To evaluate the NPV of the project, you need an estimate of your
companys cost of capital. Your firm has $
More examples for Lecture 7 (Modigliani Miller II)
1. Assume a Modigliani-Miller world with perfect capital markets ( no taxes, no
bankruptcy costs etc). A firm has a debt-equity ratio of 0.35. Its cost of debt is 4%.
Its beta is 1.2, market risk premium
EXAMPLES OF VALUATION USING WACC METHOD
Example 1
A company had 2011 Free Cash Flow to the Firm (FCFF) of 200 million. FCFF is
expected to remain the same for the indefinite future. Cost of capital is 10%. Estimate
enterprise value using the WACC method
S
CORPORATE FINANCE
6 Fl17
AMRITANAIN
MIDTERM
March 6, 2012
Total Points: 5 0
Total Time: 75 minutes
NAME
SECTION
9 :30
I 1 1:00
(Circle your section)
INSTRUCTIONS
This is a closed book exam.
There are 9 pages in this exam and a formula s
Example to understand the various inputs in a cost of equity calculation
You run a small company in the gourmet food industry and are considering expanding to
neighboring towns. You are seeking equity financing for the expansion and need an
estimate of th