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MN20211

Advanced Corporate Finance

Revision Session

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Revision SessionCourse Overview

• The Investment Decision

• Risk and Return

• Debt and Equity and some Investment

• Mergers and Acquisitions

• Project Finance

Run through major points and discuss types of questions that could come up

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Revision Session

• Investment Decision My Web, MN20211Capital Investment

Decision

1. General - Ways to evaluate - NPV vs IRR - Scale and time and capital rationing

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Revision Session Capital Investment Decision

• NPV We have to look at all the relevant, incremental

cash flows - Taxes/tax losses - Opportunity costs - Depreciation - Working capital - Cannibalisation - Opportunity cost - Terminal values

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Capital Investment DecisionFrom

Table 7.1 HomeNet’s Incremental Earnings Forecast (Spreadsheet)

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Capital investment DecisionTo

Table 7.3 Calculation of HomeNet’s Free Cash Flow (Including Cannibalization and Lost Rent)

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Revision SessionCapital Investment Decision

• Break even analysis

Using the IRR to give a feel for the ‘margin of safety’ ref the cost of capital

• Sensitivity analysis

• Scenario analysis

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Revision Session

Applying the NPV rule MN20211 NPV2

1. WACC

- Assumes you know the financing mix

2. Adjusted NPV

- Work out the present value of the tax shield

3. Free Cash Flows to Equity

- Deduct payments to debt holders and discount at cost of equity

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Revision Session

• Sort of Questions• Numbers -From Earnings flow to incremental cash

flow plus decision -WACC, APV, FTE• Chatty - NPV vs IRR - Ways to gain confidence in numbers

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Revision Session

• Weighted Average Cost of Capital

• MN20211Risk and Return

Cost of debt, Easy, well sort of

Cost of Equity, Tricky

- Expected return, Variance, Standard deviation, Portfolio, Capital Asset Pricing Model

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Revision Session

• Other models

- Gordon Dividend Growth Model

What is it?

- Arbitrage Pricing Theory

What is it?

Weighted Average Cost of Capital

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Revision Session Weighted Average Cost of Capital

• Sorts of Questions

• Numbers

• Work out the WACC given numbers for the

1. CAPM

- Know the equation, risk free, market premium, return on the market, beta etc

2. Gordon dividend growth

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Revision Session Weighted Average Cost of Capital

2. Gordon dividend growth

Know the equation, share price, dividends, growth implied or given

3. After tax cost of debt

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Revision Session

• Chatty

- What is CAPM? diversified/undiversified, systematic unsystematic, beta, covariance market portfolio etc

- Discuss the various models

Weighted Average Cost of Capital

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Revision SessionFunding

• MN20211 Equity and debt, Debt/bonds and Investments

1. Equity and Debt. Mainly about equity after some brief revision. So

- Sources and then focus on IPO’s

- Reasons for listing

- Process for listing

- Methods/mechanics of selling

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Revision SessionEquity/IPO’s

- IPO puzzles

Seasoned offerings

- mechanics

Sort of questions

Mostly chatty i.e. process, puzzles etc could be numbers on rights issues

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Revision Session

• Bonds

• Very brief mainly mechanics

• Investments

- Types and pitfalls of the ways in which yields may be calculated.

- Sort of question. Mainly chatty e.g. what is? When would it be used? Criteria for investing? What pitfalls to watch out for?

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Revision SessionMergers and Acquisitions

• Definition• Types of M&A• Motivations for M&A - strategic etc, bootstrapping• Do they work?• Determinants of success• Valuation• Form of payment• Defence - Pre, during and post bid• Codes, rules and regs

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Revision SessionMergers and Acquisitions

• Sorts of questions

• Numbers could be bootstrapping or valuations but probably not detailed cash flows as per Be&DeM

• Chatty

Types of/ motivation for

Success or lack of it

Defences

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Revision SessionProject Finance

• MN20211Projectfinance and following files to Equity and debt.

• What is it?

• Why use it?

• Risks involved

• Process

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Revision SessionProject Finance

• Risk analysis and risk sharing - Pre construction, construction and post

construction• Causes of failure• Funding - the layers of debt * senior, subordinated, mezzanine etc features

and advantagesmulti sourcing e.g. aid subsidies export guarantees

etc

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Revision SessionProject Finance

• Sorts of questions

• Chatty. What is it?

• Why?

• What risks involved in a project?

• Structure of financing

Good Luck