Final review

June 9th, 6 p.m.

Office hours next week: M 9-12

Exam format

• Material: Ch. 7-9, 11, 12

• 10 multiple choice, 5 short answer

• Short answer questions from:– 3 major questions – capital structure analysis,

dividend policy analysis, valuation

– 2 shorter questions – lease vs. buy, rights offering, venture capital method

Major topics

• Capital structure analysis– Qualitative analysis

• Advantages of debt: tax benefit, added discipline• Disadvantages of debt: bankruptcy costs, agency

costs, loss of financial flexibility• What are these advantages and disadvantages a

function of?

Major topics

• Capital structure analysis– Qualitative analysis

• Advantages of debt: tax benefit, added discipline• Disadvantages of debt: bankruptcy costs, agency

costs, loss of financial flexibility• What are these advantages and disadvantages a

function of?

Major topics

• Capital structure analysis– Quantitative analysis (cost of capital approach)

• Optimal capital structure for a firm is where WACC is minimized.

• How much does firm value increase by moving to the optimal?

• What is the ‘cost’ of the constrained optimal?

• How do we get to the optimal?– Quickly or gradually? (bankruptcy threat? Takeover target?

Industry average?)– Methods of getting to optimal

» Recapitalization, divestiture, dividend policy change, project investment capital.

Major topics

• Dividend policy analysis– Evaluate the firm’s payout policy relative to

the FCFE that the firm generates– Assess the firm’s project quality by comparing

ROC to WACC– Other considerations:

• Cash balance• Firm’s capital structure adjustment

Major topics

• Valuation– Relative valuation:

• How do we come up with an intrinsic value for a stock given a particular multiple and a particular set of comparable firms?

• What are the assumption that we make for relative valuation overall? What are the assumptions that we make for each of the multiples (P/E, P/BV, P/S, EV/EBITDA) that we have discussed?

Major topics

• Valuation– Discounted Cash Flow Valuation:

• How do we come up with an intrinsic value for a stock?

• How do we come up with estimates for: current growth rate, current FCFE, cost of equity, terminal value?

• How do we determine whether to use a single-stage (stable growth) model or a multi-stage model?

Minor topics

• What are the equity, debt and hybrid choices for firms when raising capital for investment? What are their advantages and disadvantages?

• How does a firm determine whether to use an operating lease or a capital lease?

• What is the process by which firms raise equity capital through VCs? Through an initial public offering?

Minor topics

• How do we determine what proportion ownership a VC receives for their investment in a firm (VC method)?

• What is the value of a right (in a rights offering)? What are the advantages of rights offerings?