Focus

This is a topic that could easily relate to other areas in the Level 2 curriculum, such as ethics and financial statement analysis, so be prepared for corporate governance material to show up anywhere on the 2009 exam. Warm-Up Conflicts of Interest in a Corporation A public corporation typically has multiple owners who often play little or no role in business decisions. Instead, decisions are delegated to professional managers who determine how assets are used and how the business is run. This...

Challenge problems

Benjamin Myers is an analyst for Hanover Capital Management, an equity manager specializing in large capitalization growth stocks. Myers believes that investment results for the firm could be improved if a corporate governance assessment were included as part of the criteria for analyzing investment opportunities. In a memo used to convince his colleagues of the implications for corporate governance in company valuation, Myers makes two statements to support his claim that corporate...

Return Of Nwcinv

Buildings are 39-year assets 1.3 in years 1 and 40 and 100 39 2.6 in the other years. Buildings are 39-year assets 1.3 in years 1 and 40 and 100 39 2.6 in the other years. Professor's Note You do not have to memorize the MACRS tables, but you should be prepared to use MACRS or any other accelerated depreciation method if you need to compute incremental cash flows for a capital budgeting project. The half-year convention under MACRS assumes that the asset is placed in service in the middle of...

Concept Checkers

The Board of Directors of Sarkel Systems Corporation is considering approving an 8-for-5 stock split for the company's common stock. The company currently has 1.5 million shares outstanding, and EPS for the prior year were 0.60. The company intends to maintain a 50 payout ratio. The company's stock price is currently 40 per share. Sarkel's CFO provided a memo to the board to help them with their decision of whether to approve the dividend. The memo contained the following statements 1 The...

Pecking Order Theory For Wacc

Wacc Discount Rate

MM's second proposition supports their first proposition. Since the benefits of lower cost debt are offset by the increased cost of equity, the relative amount of debt versus equity in the firm's capital structure does not affect the overall value of the firm. LOS 29.i Discuss the effect of taxes on the MM propositions, the cost of capital, and the value of a company. MM Proposition I With Taxes Value is Maximized at 100 Debt Tax shield provided by debt. Removing MM's assumption that there are...

Impact Of Dividend Initiation On Stock Value

LOS 30.n Demonstrate how the initiation of a regular dividend payout might affect the price-to-earnings multiple. According to the dividend preference theory, a company that pays dividends is often perceived as having less risk and a lower cost of equity r . We can use the constant growth dividend discount model ro see that this lower cost of equity may lead to a higher price-to-earnings ratio for the firm. Example Impact of a regular dividend payment on company P E ratio Emerald Bank and Trust...

Answers challenge problems

C Iwinski's Sratcment 1 is indicative of the pecking order theory, which states chat managers prefer financing choices that send che lease visible signal co investors, with inrernal capital being most preferred, debt being next, and raising external equicy rhe lease preferred mcrhod of financing. Iwinski's Scacement 2 is indicative of the static trade-off theory. Additional leverage could increase or decrease the value of the firm depending on the relationship between the additional cax...

Replacement Projects For Cost Reduction Questions - Mayco

Equivalent Annual Annuity

Note that if straight-line depreciation is used, the depreciation tax savings is an annuity and you can calculate the present value of that annuity directly, rather than summing the present values ol the individual depreciation tax savings for each year. Replacement project analysis occurs when a firm must decide whether to replace an existing asset with a newer or better asset. There are two key differences in the analysis of a replacement project versus an expansion project. In a replacement...

Project Risk Analysis

LOS 28.d Explain how sensitivity analysis, scenario analysis, and Monte Carlo simulation can be used to assess the stand-alone risk of a capital project. Sensitivity analysis involves changing an input independent variable to sec how sensitive the dependent variable is to the input variable. For example, by varying sales, we could determine how sensitive a projects NPV is to changes in sales, assuming that all other factors are held constant. The key to sensitivity analysis is to only change...

Learning Outcome statements

The following material is a review of the Corporate Finance and Portfolio Management principles designed to address the learning outcome statements set forth by CFA Institute. Corporate Finance, CFA Program Curriculum, Volume 3, Level 2 CFA Institute, 2008 29. Capital Structure and Leverage 30. Dividends and Dividend Policy Corporate Finance, CFA Program Curriculum, Volume 3, Level 2 CFA Institute. 2008 Derivatives and Portfolio Management, CFA Program Curriculum, Volume 6, Level 2 CFA...

Study Session

The topical coverage corresponds with the following CFA Institute assigned reading a. compute the yearly cash flows of an expansion capital project and of a replacement capital project, and evaluate how he choice of depreciation method affects those cash flows, page 14 b. discuss the effects of inflation on capital budgeting analysis, page 21 c. evaluate and select the optimal capital project n situations of 1 mutually exclusive projects with unequal lives, using either the least common...