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Erstellt / Aktualisiert 18.01.2022 / 21.01.2022
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Fenster schliessen

why are projects evaluated 

  • when firm relocates, municipalities / regions create package (tax credits, subsidized debt)  
  • With subsidized debt from government or region, firm can borrow at low rate 
Fenster schliessen

3 methods to evaluate financial benefits of debt subsidies 

 

  • Adjusted present value
  • Flow to equity approach
  • WACC method  
Fenster schliessen

adjusted present value 

  • Value of levered firm (APV) is value of project to an unlevered firm (NPV) + net present value of financing side effects (NPVF) à APV = NPV + NPVF
  • Side effects summarized by NPVF 
    • Tax subsidy to debt
    • Costs of financing distress
    • Costs of issuing new securities 
    • Subsidies to debt financing 
  • With a negative NCP, and all equity firm would reject the project 
  • But the NPV of the project under leverage = adjusted present value (APV) 
    • Positive APV: a levered firm can accept the project
    • Using debt enables saving taxes 
Fenster schliessen

flow to equity 

  • FTE is alternative capital budgeting approach 
  • Formula: cash flow from project to equity-holders of levered firm ÷ cost of equity capital (Rs) 
  • Steps
  1. Calculated levered cash flow (LCF): cash inflows – cash costs – interest (= income after interest) – corporate tax 
  2. Calculate Rs
  3. Valuation of levered cash flow: NPC is difference between present value of LFC and investment not borrowed 
Fenster schliessen

weighted average cost of capital 

  • Project of levered firms are concurrently financed with both equity and debt 
  • Cost of capital = weighted average of cost of equity and cost of debt with corporate taxes included 
Fenster schliessen

dividend, def 

Dividend = distribution from earnings 

Most common: form of cash, 2 or 4 x p.y. 

Fenster schliessen

types of dividends: 

stock dividend, dividend per share, dividend yield, dividend payout, stock split 

  • Stock dividend: paid in shares of equity
    • Increases number of shares outstanding, reducing value of each share 
  • Dividend per share: amount of dividend expressed as currency per share 
  • Dividend yield: amount of dividend expressed as % of market price 
  • Dividend payout: amount of dividend expressed as % of earnings per share 
  • Stock split: when firms declare stock split, increases number of shares outstanding
    • Resembles stock dividend, but usually larger 
Fenster schliessen

standard method of cash dividend 

  1. Declaration date: the board of directors declares a payment of dividends
  2. Record date: the declared dividends are distributable to shareholders of record 
  3. Ex-dividend date: share of equity becomes ex-dividend on the date the seller is entitled to keep the dividend
  4. Payment date: dividend cheques are mailed to shareholders of record