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MindMap Gallery Corporate Finance CFA Level 2
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Corporate Finance CFA Level 2
A mind map for Corporate Finance CFA Level 2 (5%-10%). This map shares knowledge about capital budgeting, capital structure, dividends and share repurchases, ESG, and mergers and acquisitions. Come and take a look!
Edited at 2023-09-13 19:55:43
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Corporate Finance CFA Level 2
- bacteria
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- Outline
Corporate Finance CFA Level 2 (5%-10%)
capital budget ★★★
Context: Calculate cash flow when investing in a project. When investing a portion of funds in multiple projects, you must consider the issue of limits. Which projects can be invested to maximize returns?
Cash flow calculation, paragraph 3
initial investment
Fixed capital investment FCInv
Net working capital investedNWCInv
Cash proceeds from disposal of old assets
Interim after-tax operating cash flow
S-Income, C-Cash costs, D-Depreciation
Non-operating cash flow after tax at the end of the period
Use incremental cash flow after tax; Ignore financial costs; Ignore sunk costs; Consider opportunity costs; Consider externalities;
Project analysis and evaluation
Projects with different cycles
least common multiple method
Repeat the investment, end up with each other, and calculate the NPV
Equivalent Annuity Act EAA
Calculate NPV based on cash flow, and then calculate PMT
capital quota capital rationing
Profitability Index PI
Select the project with the largest NPV under limited investment amount
Project risk analysis, for NPV, IRR
Project individual risk
sensitivity analysis
Scenario analysis
Monte Carlo simulation
market risk
CAPM
Real options: adapting to circumstances
type
timing options
sizing options
Withdrawal rightsabandonment options
expansion rights optionsgrowth
flexibility options flexibility options
pricing power
Flexible production rights
fundamental options
Buying a gold mine is equivalent to being able to mine at the right time and having mining rights.
With real options NPV = Weighted NPV of different project situations Option value – Option cost
Factors affecting valuation
Depreciation method: accelerated depreciation has a large NPV
inflation
Higher-than-expected inflation reduces tax shield effect
Inflation has inconsistent effects on revenue and costs
Unexpected inflation reduces the value of fixed income
Some issues that need attention
Economic feedback: Have peers followed up?
Template error: applying template
pet projects
financial indicator
IRR VS NPV
cash flow estimation errors
s
discount rate error
Capital Excess & Balance
Or invest in other projects
Sunk costs & opportunity costs
Capital Structure ★★★
After-school questions test a lot of pecking theory
weighted average capital structure
All are market values
MM theory
No tax
Think: Under the assumption, capital structure has no impact on company value
hypothesis
Investors have the same expectations for cash flow
Markets are perfect and frictionless
Risk-free interest rate lending
No agency costs
Capital structure has no impact on operating income, financing and investment are independent
in conclusion
Equity capital is a function of D/E
There is tax
in conclusion
Other factors affecting capital structure
cost of financial crisis
agency cost
type
Monitoring costs
binding contractbonding cost
Competition agreement, etc.
Residual loss residual cost: the remainder after dividing the above two
Agency theory: increasing the proportion of debt financing can reduce agency costs
Free cash flow assumes that debt is more binding
Information asymmetry
Corporate management knows the company better than shareholders and creditors
pecking order theory pecking order theory
Sequence: internal financing > debt financing > external equity financing
Practice
debt rating
Assess capital structure
changes in time
Peers
governance level
Industry characteristics
cash flow volatility
Supervision
national factors
static equilibrium theory
Consider the costs of financial distress
L=levered; U=unlevered
The optimal capital structure is used as the target capital structure, but it will deviate due to:
price fluctuations
issuance cost
Tactical financing, short-term opportunities
Dividends and share buybacks ★★
dividends
Dividend payout ratio: dividends/net income
type
regular cash dividend
special dividend
liquidating dividend
stock dividends
Stock split 2-for-1
Influence
Cash dividends change the capital structure, stock dividends and stock splits do not change the capital structure
dividend policy theory
MM theory
Dividends will not affect the value of shareholder wealth, and you can sell stocks to gain homemade dividends
unrelated dividends
bird in hand
Dividends are more popular with investors
tax
follower effect clientele effect
Different investors have different preferences for dividend policies
After-tax capital gains = after-tax dividends
Signaling effect: Dividend distribution reflects the company's situation
agency cost
Shareholders and Management
shareholders and creditors
Dividend restrictions
Influencing factors
expected earnings volatility
financial flexibility
tax
double taxation systemdouble taxation system
Taxes are imposed at both the company and shareholder levels
dividend imputation tax system
Avoid double taxation, levy taxes at the company level, shareholders will get refunds for excess and supplement less, and corporate tax will be offset against personal tax.
split-rate tax system split-rate tax system
The tax rate on retained earnings at the corporate level is different from the tax rate on dividends, and individuals still need to be taxed
issuance fee
Lawyers, investment banks, etc.
Adverse effects on stock price
Legal & Contractual Limitations
dividend policy
Smooth dividend policy
Current Dividend (Target Dividend - Current Dividend) × Adjustment Factor
Adjustment factor = 1/number of years
constant dividend payout ratio
Residual dividend payment
Satisfy equity capital needs before issuing dividends
Dividend safety
index
dividend payout ratio
dividend coverage
FCFE coverage
Dividends unsustainable
Deterioration of indicators
Dividend yield is too high
Debt to pay dividends
Variety
Few pay dividends, but big companies pay high dividends
More people are using buybacks
Agency problems reduce the use of dividends
Weakening relationship with corporate governance
Share buyback
method
open market repurchase
fixed price offer
Widely advertising
Dutch auction
Find the lowest price and buy it at the lowest price
direct agreement repurchase
Influence
Impact on financial statements
Cash repurchases reduce cash, assets, and net assets, increase financial leverage, and do not affect the company's profits.
Debt repurchases increase liabilities, reduce net assets, increase leverage, and interest expenses reduce profits.
Impact on EPS
cash buyback
Shares decrease, profits remain unchanged, EPS↑
Debt repurchase
Interest reduces profits, and buybacks reduce the number of shares. The impact needs to be evaluated.
↑The borrowing interest rate is greater than the actual rate of return, and EPS declines
Impact on net assets per share BVPS
Reduce net assets and reduce the number of shares
The repurchase price is low and the BVPS is increased, which is equivalent to buying stocks below the BV and earning
Dividends vs Share Buybacks
Advantages of share buybacks
management flexibility
tax
Affect stock price
Transfer of benefits
Prevent EPS dilution
Increase financial leverage
ESG ★
Equity structure
Centralized
major shareholder
Dispersed
Hybrid
ownership structure
Horizontal type: AB cross holding
Vertical type: A holds B, B holds C
Ownership and Voting Rights Conflict
all scattered
There is an obvious conflict between shareholders and management
All concentrated
Harm the interests of small and medium shareholders
Concentration of voting power
Concentrated ownership
Structure when voting is restricted
Shareholder type
bank
family
state-owned enterprises, SOEs
corporate investor
Group company
private placement
foreign investors
Management & Board Members
Factors affecting corporate governance
board independence
Number of independent directors
Company structure
unitary system
only board of directors
dual system
Board of Directors & Supervisory Board
Shareholders' meeting → Supervisory Board → Management Board → Management
voting system
principal–principal problem
Voting rights and equity are concentrated
Listing requirements
Management Principles: Empowering Investors
Evaluate corporate governance
Board of Directors
Member structure
independence
Professional committees: remuneration committee, audit committee, etc.
Professionalism: members’ industry background
Diversity of composition: different industries and different experiences
executive compensation
Prevent it from being too high and link it to performance
The executive director determines the remuneration say-on-pay, and the remuneration may not be reasonable
Shareholder voting rights
One share, one vote: straight-line voting system
ESG
ESG information sources
Specialized research methods
ESG data provider
MSCI
non-profit organization
IIRC
GRI
SASB
green bond
Liquidity risk since it is generally held to maturity
Greenwashing risks, not investing in ESG projects
mergers and acquisitions ★★★
basic concept
Merger (all) & acquisition (part)
statutory mergerstatutory merger
A B=A
subsidiary mergersubsidiary merger
A B=A B (subsidiary)
New consolidation
A B=C
Hostile & friendly acquisitions: whether approved by management
Horizontal mergers and acquisitions: same industry
vertical merger
Merge the upstream and downstream of the industry chain
Backward integration: acquiring upstream
Forward integration: acquiring downstream
conglomerate merger
Cross-industry mergers and acquisitions
M&A motivation
Synergy
exogenous growth
market powermarket power
Obtain special resources and technology
Decentralized
Bootstrapping earnings
Financial indicators look good after the acquisition
management wishes
tax
Resource integration unleashes potential
Transnational operations
Take advantage of market inefficiencies, such as going to countries with low labor costs
Avoid regulation
Technology Transfer
Product differentiation and product line expansion
follow customers
Motivation during different life cycles
Start-up
Large companies enter new fields, while small companies look for backers
Cross-industry, horizontal
Rapid growth
Need money to expand production capacity
Cross-industry, horizontal
mature growthmature growth
economies of scale
vertical, horizontal
stabilization and market maturity stage stabilization and market maturity
Economies of scale, expanded financing
Horizontal
Slowing growth, recession phase
Survive, new growth point
Across, vertically, horizontally
M&A classification
by purchase method
Share purchase
Half of them agree, it takes a long time, and the acquired party pays taxes.
asset purchase
Fast and avoid acquirer debt
By payment method
cash payment
Securities payment
exchange ratio
According to the wishes of the target company
friendly acquisition
hostile takeover
bear hug bear hug
Bypass management and go directly to the board of directors
tender offer
Offer to shareholders, sell to shareholders
proxy fight
Enter the board of directors, change management, and make a good-faith acquisition
Anti-takeover measures
Pre-offer measures
poison pills poison pills
flip in
Common shareholders of the target company have the right to purchase shares of the target company at a discount
pop flip over
The original shareholders of the acquired company have the right to purchase new shares of the acquiring company at a discount
Once a dead hand provision is started, it cannot be stopped.
Permanent Operating Clauses. The company's articles of association state that the original directors and managers of the company cannot be replaced. It falls into the category of self-defense mechanisms or poison policies adopted by companies to prevent being acquired.
poison put poison puts
Let creditors demand debt at high prices, and the company's cash flow will deteriorate.
Some regions restrict hostile takeovers
staggered board of director
Directors cannot be replaced all at once; they must be replaced gradually over several years.
restricted voting provision
Acquire a large proportion of equity in a short period of time and lose voting rights
supermajority voting provision
Articles of Association require the approval of a majority of shareholders for certain transactions
fair price amendments allowed
The merger price cannot be lower than a certain level
golden parachutes golden parachutes
Equity changes, high compensation for executive resignation
post-offer measures
Reject directly
litigation litigation
Blackmail by the acquirer, blackmail by the green ticket
Give money and settle the matter
Share buyback
bid up stock price
leveraged buyout leveraged buyout
Taking the company private with private equity
Leveraged recapitalization
Partial repurchase
crown jewel crown jewel defense
sell the pearl
backlash defense pac-man defense
Initiate a counter-takeover from the acquirer
white knight defense
Find a third-party company to acquire your own shares
Disadvantages: winner's curse, the winner spends a lot of money
white squire defense
A third party buys a small amount of shares
Target company valuation
discounted cash flow model
advantage
Assess cash flow
intrinsic value based on expectations
Assumptions can be corrected
shortcoming
free cash flow non-profit
The longer the cash flow goes on, the more inaccurate it becomes.
WACC fluctuations
terminal value sensitive
Comparable company analysis
method
The multiplier method is used to value the stock, plus a premium, equal to the target company’s share price.
advantage
It is reasonable to refer to similar companies
data available
Assume less
shortcoming
market misleading
Need to estimate premium
Failure to consider future changes in the target company
Comparable transaction analysis
method
Based on the acquisition price, the multiplier method is used to estimate the acquisition value (multiple averages)
advantage
No premium estimate required
Assume less
Low litigation risk and objective M&A cases
shortcoming
The past does not represent the future
Little data
Ignore future changes
Evaluate M&A transactions
Target company shareholders benefit
Consideration paid by the acquirer - value of the target company before the merger
Acquirer gains
S-coordination effect value
Post-merger company value
Pre-M&A Acquirer Value Pre-M&A Target Value Synergies - Cash
Cash payment and share-based payment benefit calculation
Reorganization
Reasons for divestment
strategic changes
Main business development
anti-coordination
Sell and make money
Reorganization method
equity carve-out
Establish a new entity, issue shares to external investors, and partially sell
spin-off
Proportional separation, both companies have the same fixed and shareholding ratios
Easy stock restructuring split-off
shareholders separated
liquidation