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A concise overview of key concepts in corporate finance, focusing on shareholder rights, market efficiency, risk management, and the weighted average cost of capital (wacc). It includes definitions and explanations of essential terms such as voting rights, dividends, efficient market hypothesis, variance, standard deviation, beta, capm, and corporate governance mechanisms. The document also covers methods for estimating the cost of capital, factors influencing wacc, and strategies for aligning managerial incentives with shareholder interests. It serves as a useful study aid for understanding core principles in finance. Useful for students who want to review the main concepts of corporate finance. It is a good starting point for further research.
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voting, dividends, new shares, proxy - ANSWER 4 Rights of shareholders Proxy statement - ANSWER Vehicle for shareholders to vote efficient market hypothesis - ANSWER says that stock prices reflect info quickly and completely weak form efficiency - ANSWER says that stock prices reflect all past information semi-strong efficiency - ANSWER says that stock prices reflect all publicly available information strong form efficiency - ANSWER says that stock prices reflect all public and private information Variance - ANSWER The of returns is a measure of the volatility of returns Standard deviation - ANSWER the explains the deviation from expected returns as a percentage Coefficient of variation - ANSWER Standard deviation/ average return Covariance - ANSWER This tells us how returns of different securities moves together
unbounded - ANSWER Like variance, covariance is correlation coefficient - ANSWER A standardized measure of how returns move together risk - ANSWER uncertainty systematic - ANSWER risk that comes from market wide factors and affects a large number of assets Unsystematic - ANSWER risk that is asset specific diversification - ANSWER spreading your assets across different types of assets lower - ANSWER diversification will risk Beta - ANSWER measures the systematic risk of an asset 1 - ANSWER The beta risk of the market is 0 - ANSWER the beta of a risk-free asset is CAPM - ANSWER asset pricing model saying that return on an asset depends on time value of money and risk compensation up - ANSWER when there is an increase in inflation, we expect return to go up - ANSWER when there is an increase in risk aversion, we expect return to go
target capital structure - ANSWER Even if a firm has a capital structure, we will use their when calculating WACC Required rate of return - ANSWER WACC is the for the firm interest rates, market risk premium, taxes - ANSWER External factors to WACC capital structure, dividend policy, investment policy - ANSWER Internal factors to WACC cash flows - ANSWER Required rate of return reflects the risk of the Pure play method - ANSWER A company beta where the company operates in a single line of business accounting beta method - ANSWER Using accounting methods to measure beta WACC - ANSWER How do we calculate corporate value? Present value of future cash flows discounted at marketable securities, real estate investments, investments in other companies, excess cash - ANSWER Non operating assets include: operating assets + non operating assets - ANSWER Value of firm is equal to: Sales growth, operating profitability, capital requirements, wacc - ANSWER 4 drivers of firm growth: Sales growth - ANSWER Says that all else equal, an increase in sales will increase firm
value reduce - ANSWER If we can WACC, we can increase value corporate governance - ANSWER umbrella term referring to all tools we have to align incentives of managers with shareholders managerial entrenchment, compensation, board of directors - ANSWER 3 types of corporate governance: targeted share repurchase, shareholder rights provisions, restricted voting rights - ANSWER 3 ways we entrench managers and prevent hostile takeovers Targeted shares repurchase - ANSWER when a hostile entity acquires our stock, this allows the firm to buy back shares from the hostile bidder at a premium Greenmail Shareholder rights provisions - ANSWER allows the firm to sell shares of stock to existing shareholders at a discount Poison pills Restricted voting rights - ANSWER allows a firm to remove voting rights of a shareholder if they reach a certain % of ownership Stock options - ANSWER give the manager the right to purchase shares at a fixed price before a certain date WACC - ANSWER How do we calculate corporate value? Present value of future cash flows discounted at Employee Stock ownership program - ANSWER ESOP diversity - ANSWER The disadvantages of an ESOP is that it creates a lack of for employees inside directors, large board, Chairman and CEO duality, interlocking board, staggered