公司金融期末复习Problem:1.Function of financial market and list some financial intermediarieAnswer1:A.contributing to higher production and efficiency in the economyB.Improving the well-being of consumers by allowing them to their purchases better Answer2:(1) facilitate investment and financing.(2) a reasonable guidance of capital flow, which contributes to the concentration of capital and promotes the transfer of high-efficiency units.(3) convenient and flexible turnover of funds.(4) to achieve risk diversification, reduce transaction costs. (5) are conducive to enhancing the flexibility of macro-control. (6) to help strengthen economic ties between regions and countries. Intermediaries: BanksBuilding societies Credit unionsFinancial advisers or brokers Insurance companiesCollective investment schemes Pension funds2.Why profit maximization is not an ideal corporate finance objective?(1)The primary goal of corporate finance is maximize or increase shareholder value not profit(2)To a skilled accountant, however, a decision that increases profits under one set of accounting rules can reduce it under another.(3)Accounting profits are not necessarily the same as cash flows.(4)The problem with profit maximization as a goal is that it does not tell us when cash flows are to be received.(5)Profit maximization ignores the uncertainty or risk associated with cash flows.总：For the fact that a firm cannot survive with mere profitmaximization ,but must increase long-term security through investment and meeting shareholder expectations. This will increase their productive capacity for the future as well as encourage the risky capital investment of the shareholders.3.Characteristics of business organization:(1)sole proprietorship: A business owned and managed by a single individual. Features: Cheapest to form. no formal charter, few government regulations Pays no corporate income taxesUnlimited liability for business debts and obligations. Its life islimited by the life of the sole proprietorThe money raised is limited by the proprietor’s personal wealth(2)partnership:A business formed by two or more individuals or entities.General partnership: All partners share in gains or losses, all have unlimited liability for all partnership debts.Limited partnership: One or more general partners will run the business and have unlimited liability. The limited partner's liability is limited to their contribution to the partnership. Features: Often inexpensive and easy to form Difficult to transfer ownershipDifficult to raise large amounts of cash Income is taxed as personal income(3)Corporati on:Is a legal “person” separate and distinct from its owners . Features: Limited liability for stockholders. Unlimited life for the business.Ownership can be easily transferred.These characteristics make it easier for corporations to raise capital. The disadvantage to corporations is double taxation.4.Why separation of ownership and management is necessary and desirableProfessional Managerial Skills:The growth of a company comes with the demand for different skills to manage the operations of the company, meaning the owners of a company may nothave all of the necessary skills and experience needed for certain managerial roles. Creating a management team separate from the ownership enables the company to be run by professionals with diverse skills such as in marketing, corporate financing and public relations. Easier Performance Appraisals:Performance appraisals are an essential part of good corporate governance, as they enable managers to evaluate the company and to point out areas of improvement. It can be complex to evaluate performance where there is a lack of separation of ownership and management. But separation makes it easier for the board and those in management to be evaluated objectively. Owners can freely deal with the chief executive officer and other senior managers, even after the appraisals.Capital UtilizationCapital utilization involves the arrangements that determine the way in which resources and assets are managed in a company. Separating personal assets and liabilities from the business assets and liabilities may prove difficult for company owners. Managers come in to devise ways in which business assets are managed to generate the highest profits for all shareholders. Checks and BalancesSeparate managers and owners in a firm ensure that a system of checks and balances is in place. Managers act as a buffer between the company and stakeholders such that they can alleviate negative impacts of stakeholder activities and avoid hitches in public relations. Managers are well suited to put in place strategies that will lessen losses to the rest of the stakeholders as a result of the actions of another stakeholder.5.What is corporate finance and describe their decisions?(Shenli)Corporate finance is the study of the answers to the following questions: (1) What long-term investments should you take on?(2)Where will you get the long-term financing to pay for your investment?(3) How will you manage your everyday financial activities?(WIKI)Corporate finance is the area of finance dealing with the sources of funding and the capital structure of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources. InvestmentDecisions: Concerning non-current assent or capital budgeting. Evaluating the size, timing and risk of future cash flow. Cash flow versus accounting profitFinancing Decisions: Determine how the assets will be financed. What is the best type of financing? What is the best financing mix?What is the best dividend policy (dividend decision)? Capital structureAsset Management Decisions:How do we manage existing assets efficiently?Greater emphasis on current asset management than fixed asset management.Working capital management.6.Evaluate IRR ruleFor the fact that internal rate of return is a rate quantity,it always is used to be an excellent indicator of the efficiency, quality, or yield of an investment.However,As an investment decision tool, the calculated IRR should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in.The IRR does give you a rate of return,but the IRR could be for a small investment or for only a short period of time.7.The characteristics of bond,stock and preferred?Bond: A bond is a long-term debt instrument issued by a corporation or government. The Face/par/maturity value (MV) [or face value] of a bond is the stated value.The bond’s coupon rate is the stated rate of interest; the annualinterest payment divided by the bond’s face value.The discount rate (capitalization rate) is dependent on the risk of the bond and is composed of the risk-free rate plus a premium for risk.In general, debt securities are characterized by the following attributes:- Creditors (or lenders or bondholders) generally have no voting rights. - Payment of interest on debt is a tax deductible business expense.- Unpaid debt is a liability, which means that default subjects the firm to legal action, by the creditors. Ultimately, financial distress may result in bankruptcy filingPreferred stock :Preferred Stock is a type of stock that promises a (usually) fixed dividend, but at the discretion of the board of directors.Preferred Stock has preference over common stock in the payment of dividends and claims on assets.Preferred stock represents equity in the firm, but has features of debt; stated yield, preference in terms of cash flows and liquidation, and some issues are callable and/or convertible into common shares.8.Describe net operation theory ,traditional theory,MMwithout(with)corporate tax,with bankruptcy and agency costtheory9.Describe business risk and DFLBusiness risk:It is the risk associated with operating earnings.Operating earnings are risky because total revenues are risky ,as are the costs of producing revenues.Financial risk is the associated with how a company finances its operations.DFL(degree of financial leverage):is the sensitivity of the cash flows available to owners when operating income changes.DFL=(Percentage change in net income)/(Percentage change in operating income)10.Which cash flow should(not) be taken into account when estimate project cash flowsCash flow from assets = + operating cash flow - capital spending - additions to net working capital Operating cash flow = + earnings before interest and taxes (EBIT) + depreciation - taxesShould be taken into:opportunity cost ,side effect,spillovereffect,NWC(Net Working Capital),Taxes,operating cash flow,capital spending Should not be taken into:sunk cost,financial cost,Calculation:PV of a perpetuity = P / iIn this formula "P" represents your annual payment and "i" represents your interest or discount rate. PV of a growing perpetuity = P / (i - g)In this formula "P" represents your annual payment, "i" represents your interest or discount rate and "g" represents the growth rate.2.Valuation of bond(half year)and stock3.Investment criterion IRR,NPV,PBP,PINPV:Giventhe (period, cash flow) pairs (, present valueis given by:) whereis the total number of periods, the netIRR:NPV=0,i=IRRGiven the (period, cash flow) pairs(, present valueis given by:)whereis the total number of periods, the netPBP:Payback Period = W + (X - Y) / ZW is the year before which the investment value is crossed in cumulative cash flows X is the initial investment or the initial cash outlayY is the cumulative cash flow just before the investment value is crossed in cumulative cash flows Z is the cash flow of the year in which the investment value is crossed in the cumulative cash flows PI:PI=(PV of future cash flow )/(Initial investment)=1+NPV/(Initial investment)4.Expanding and Replacement:;EAC:EAC = NPV/A t, r where A= the present value of an annuity factor t = number of periods r = interest rateA t, r=(1-1/(1+r)^t)/r5.WACC,CAPM:WACC:whereis the number of sources of capital (securities, types of liabilities);is the requiredrate of return for security; andis the market value of all outstanding securities .where D is the total debt, E is the total shareholder’s equity, Ke is the cost of equity, and Kd is thecost of debt. Tax effects[edit]Tax effects can be incorporated into this formula. For example, the WACC for a company financedby one type of shares with the total market value ofand cost of equity and one typeof bonds with the total market value of and cost of debt , in a country with corporatetax rate, is calculated as:CAPM:where:is the expected return on the capital assetis the risk-free rate of interest such as interest arising from government bonds(the beta) is the sensitivity of the expected excess asset returns to the expected excess marketreturns, or also,is the expected return of the marketis sometimes known as the market premium (the difference between theexpected market rate of return and the risk-free rate of return).is also known as the risk premiumRestated, in terms of risk premium, we find that:Modified formula:"where:is required return on security iis risk-free rateis general market risk premiumis risk premium for small sizeis risk premium due to company-specific risk factor6.DOL,DFL,DTL,EPS-EBITDOL:DOL =% change in EBIT / % change in sales DFL:DFL =% change in EPS / % change in EBIT DTL:DTL =% change in EPS / % change in sales EPS:earnings per shareEBIT:operating profit7.MM without and with corporate tax;arbitrageWithout taxesProposition Iwhereis the value of an unlevered firm = price of buying a firm composed only of equity, and is the value of a levered firm = price of buying a firm that is composed of some mix of debt and equity. Another word for levered is geared, which has the same meaning.Proposition IIwhereis the required rate of return on equity, or cost of equity.is the company unlevered cost of capital (ie assume no leverage).is the required rate of return on borrowings, or cost of debt.is the debt-to-equity ratio.With taxesProposition Iwhereis the value of a levered firm.is the value of an unlevered firm. is the tax rate () x the value of debt (D)the term assumes debt is perpetualProposition IIwhere:is the required rate of return on equity, or cost of levered equity = unlevered equity +financing premium.is the company cost of equity capital with no leverage (unlevered cost of equity, or return onassets with D/E = 0).is the required rate of return on borrowings, or cost of debt.is the debt-to-equity ratio. is the tax rate.。
