MN20211
Advanced Corporate Finance
Revision Session
1
Revision Session
Course Overview
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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
2
Revision Session
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Investment Decision
My Web, MN20211Capital Investment
Decision
1. General
- Ways to evaluate
- NPV vs IRR
- Scale and time and capital rationing
3
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 Decision
From
Table 7.1 HomeNet’s Incremental Earnings Forecast
(Spreadsheet)
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Capital investment Decision
To
Table 7.3 Calculation of HomeNet’s Free Cash Flow (Including
Cannibalization and Lost Rent)
6
Revision Session
Capital 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
7
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
9
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
10
Revision Session
Weighted Average Cost of Capital
• Other models
- Gordon Dividend Growth Model
What is it?
- Arbitrage Pricing Theory
What is it?
11
Revision Session
Weighted Average Cost of Capital
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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
12
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
13
Revision Session
Weighted Average Cost of Capital
• Chatty
- What is CAPM? diversified/undiversified,
systematic unsystematic, beta, covariance
market portfolio etc
- Discuss the various models
14
Revision Session
Funding
• 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
15
Revision Session
Equity/IPO’s
- IPO puzzles
Seasoned offerings
- mechanics
Sort of questions
Mostly chatty i.e. process, puzzles etc could
be numbers on rights issues
16
Revision Session
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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?
17
Revision Session
Mergers 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 Session
Mergers 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
19
Revision Session
Project Finance
• MN20211Projectfinance and following files
to Equity and debt.
• What is it?
• Why use it?
• Risks involved
• Process
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Revision Session
Project 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 advantages
multi sourcing e.g. aid subsidies export guarantees
etc
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Revision Session
Project Finance
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Sorts of questions
Chatty. What is it?
Why?
What risks involved in a project?
Structure of financing
Good Luck
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