Corporate Finance Study Guide
Valuation- “projected financial performance into values.” Involves projecting/ making budgets. Value of an Asset = Value of Cash Flow (CF) it Will Generate (not profits) CF=1/(1+r)^1 value is based on three things- Current Cash Flow, Expected growth (used with to estimate future cash flow), Riskiness of expected future cash flow (discount rate).Net Present Value- Value CFs using project discount rate based on risk Investment Decision-which real assets the firm should acquire.Choose positive and greatest NPV.value through CF Financing Decision- how to raise money needed for a firm’s investments in real assets. Choose capital structure to minimize cost of capital, maximize value of the firm. value through the cost of capital
Valuation adjustments- Time, Risk, Inflation, LiquidityTruncated cash flows: (Time) receive $CFt each period until time T. Constant discount rate 10%. Investment of $100 in time 0. CFs of $22 in t=1 and $121 in t=2
Annuity: receive $CF each period until time N Perpetuity: receive $CF each period forever
Gordon Formula- (perpetuity) for valuing a firm with growing dividends π =risk premium.the risk premium is everything above the risk free rate, r+π = Risk Adjusted Discount Rate (RADR)
Nominal rate - Actual rate of return( using actual dollars) rnomial=real+I, Real rate - Rate adjusted for inflation(using constant dollars), i.e. the return in today’s dollars.
Balance sheet (a given point of time)and income statement: Firm’s two main financial constructs Income statement-operating performance of the firm over a given time period
Cash flow statement- derived from income statement and changes in balance sheet FCF-Free Cash Flow- is cash available to distribute to stockholders and bondholders. Profits already have payments to debt holders subtracted out. Profits are thus cash available for equity holders. FCF represents returns to all financing. Firms are valued by discounting future FCF. FCF includes only the cash available to the firm
Valuation adjustments- Time, Risk, Inflation, LiquidityTruncated cash flows: (Time) receive $CFt each period until time T. Constant discount rate 10%. Investment of $100 in time 0. CFs of $22 in t=1 and $121 in t=2
Annuity: receive $CF each period until time N Perpetuity: receive $CF each period forever
Gordon Formula- (perpetuity) for valuing a firm with growing dividends π =risk premium.the risk premium is everything above the risk free rate, r+π = Risk Adjusted Discount Rate (RADR)
Nominal rate - Actual rate of return( using actual dollars) rnomial=real+I, Real rate - Rate adjusted for inflation(using constant dollars), i.e. the return in today’s dollars.
Balance sheet (a given point of time)and income statement: Firm’s two main financial constructs Income statement-operating performance of the firm over a given time period
Cash flow statement- derived from income statement and changes in balance sheet FCF-Free Cash Flow- is cash available to distribute to stockholders and bondholders. Profits already have payments to debt holders subtracted out. Profits are thus cash available for equity holders. FCF represents returns to all financing. Firms are valued by discounting future FCF. FCF includes only the cash available to the firm