IFM lecture 9
IFM lecture 9 valuation and capital for levered firm / dividends and payouts
IFM lecture 9 valuation and capital for levered firm / dividends and payouts
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Set of flashcards Details
| Flashcards | 22 |
|---|---|
| Language | English |
| Category | Micro-Economics |
| Level | University |
| Created / Updated | 18.01.2022 / 21.01.2022 |
| Licencing | Not defined |
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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
3 methods to evaluate financial benefits of debt subsidies
- Adjusted present value
- Flow to equity approach
- WACC method
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
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
- Calculated levered cash flow (LCF): cash inflows – cash costs – interest (= income after interest) – corporate tax
- Calculate Rs
- Valuation of levered cash flow: NPC is difference between present value of LFC and investment not borrowed
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
dividend, def
Dividend = distribution from earnings
Most common: form of cash, 2 or 4 x p.y.
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
standard method of cash dividend
- Declaration date: the board of directors declares a payment of dividends
- Record date: the declared dividends are distributable to shareholders of record
- Ex-dividend date: share of equity becomes ex-dividend on the date the seller is entitled to keep the dividend
- Payment date: dividend cheques are mailed to shareholders of record
