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21 Cards in this Set
- Front
- Back
Working Capital |
Current assets - current liabilities |
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Business valuation - Asset-based approach |
To decide which valuation approach to apply, we must first determine whether the entity is a going concern. · If the entity is NOT a going concern, a liquidation approach must beused o Net realizable value will depend upon whether or not there is a “forced” sale, or orderly liquidation · If the entity IS a going concern, and the entity does not maintain active operations, the Adjusted Net asset approach may be appropriate o Assets are valued at fair market value, net of disposition and tax costs o Liabilities are paid |
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Business valuation - Income-based approach |
If the entity IS a going concern, and the entity maintains activeoperations and “excess earnings”, an income-based valuation approach may beappropriate · Capitalized cash flow approach- where the entity has consistent cashflows that are reflective of future earnings considering: o Maintainable (normalized)EBITDA o Sustaining capitalreinvestments o Capitalizationrate/multiplier o Income tax shield o Redundancies · Discounted cash flow approach- where the entity is in the start up stage · Market based approach- where there is publiclyavailable comparative information available |
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Capital Budgeting - Buy vs Lease |
Calculate NPV of each option: NPV of buy optio n: -cost -PV of tax shield -maintenance costs NPV of lease option: -PV of after tax lease payments Other factors: -impact on covenants -cash flows (leasing lessens current cash burden -leasing easier to come by if can't obtain financing -purchasing might provide more flexibility -leasing might insulate from severe declines in value -possible tax advantages (lease pmts fully deductible) Case: Fitness Elitists Inc. |
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Financing Options - debt vs equity |
Debt financing: -Loan -Lease -Gov't assistance Equity financing: -Angel investors - generally passive -Venture capitalists - looking for high returns (>30%), active participants in mgmt, clear exit strategy -Private equity - typically later in lifecycle, lower risk -Public mkts Case: Fitness Elitists Inc. |
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Incremental Cash Flows |
Incorporate tax-affected initial outlay, annual revenues and expenses, terminal value(cost)
Case: Molly Sue Brews, Kinfolk |
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NPV vs. IRR |
NPV - positive NPV = invest IRR - rate of return > opp'ty cost of capital = invest Rate of return = discount rate at which NPV of project = 0 Thus both should give same answer A project’s cash flows should include incremental elements only (i.e.additional sales, associated expenses, lost margin on cannibalization,investment & associated tax-shield, etc., but no financing elements, asdiscounting of the cash flows already addresses financing) Case: Rent a Bike |
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Discounted vs. Undiscounted cash flows |
Case: Rent a Bike |
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Payback period |
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NPV - residual value |
Don't include - only include cash inflows/outflows Case: Week 3 Day 1 - PRI |
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Rate Function in Securexam |
=RATE(nper,pmt,pv,[fv],[type],[guess]) 0=end of period 1=begin |
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IRR Function in Securexam |
=IRR(values,[guess])
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Declining Balance Function in Securexam |
=DB(cost,salvage,life, period,[month])
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Modified IRR in Securexam (if CFs reinvested) |
=MIRR(values,finance_rate,reinvest_rate
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Payment Function in Securexam |
=PMT(rate,nper,pv,[fv],[type]) |
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Weighted average cost of capital |
(Interest % on debt (after-tax)) + (Interest on preferred shares) + (Cost of equity per CAPM) All weighted by % of debt/equity on B/S *After tax interest % on debt = I-rate x (1-tax rate) |
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Capital Asset Pricing Model (for WACC) |
= Rf + B (Rm - Rf) Rf= Risk free rate B= Beta Rm = Market's expected rate of return |
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Inventory turnover |
COGS/Ave inventory Days in inventory: 365/(COGS/Ave inventory) |
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Buy vs Lease - qualitative factors |
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Valuation of Preferred shares/Common shares |
PV of annual PS Dividend/PS Holders' required rate of return *same for Common shares |
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Common synergies |
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