29-05-2012, 01:17 PM
CORPORATE FINANCE
CORPORATE FINANCE.ppt (Size: 2.97 MB / Downloads: 621)
Learning Objectives
How ROE and the required return by common equity investors are related to a firm’s growth opportunities
How to apply the steps involved in estimating a firm’s weighted average cost of capital, including how to estimate the market values of the various components of capital, and how to estimate the various costs of these components
How operating and financial leverage affect firms
The advantages and limitations of using growth models and/or risk models to estimate the cost of common equity.
The Short Story of WACC
The weighted average cost of capital (WACC) serves three primary purposes:
To evaluate capital project proposals before-the-fact.
To set performance targets in order for management to sustain or grow market values, and
to measure management performance after-the-fact.
Identify the relevant sources of capital (debt and equity).
Estimate the market values for the sources of capital and determine the market value weights.
Estimate the marginal, after-tax, and after-floatation cost for each source of capital.
Calculate the weighted average.
Important Terms
Financial Structure
The whole right-hand side of the balance sheet
Includes both short-term and long-term sources of financing (debt and equity)
Capital Structure
How the firm finances its invested capital
Excludes accruals and accounts payable – short-term liabilities that are not strictly debt contracts, that spontaneously change in response to the operations of the business.
Includes:
Bank Loans
Long-term debt
Common stock and retained earnings
The Most Important Corporate Finance Decisions
It is the managers job to maximize shareholders’ wealth.
In this and the next chapter we will address two of the most important ways manager can add value to the firm:
Changing the mix of financing used by the firm (changing the relative proportions of debt and equity), and
Determining the minimum rate of return needed to maintain the current market value.