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Study Session 7: Corporate Finance

Corporate Finance

Hi, I am having some trouble in understanding “Capital Charge”. I do not quite understand what does it mean in itself and how does it impact residual income. This is the first time I am hearing this term.

I would appreciate if anyone can help me understand it.

Thanks!

Loan by fixed vs floating rate bond

Hey i hope this is the right place to post this,  I’m having trouble understanding how to calculate this: 

We are to find the cheapest borrowing option between: 

1:issuing a bond at 7% fixed rate for 5 years, twice a year
2: issuing a floating rate bond for 5 years at central bank rate plus six hundred basis points, the payments are divided into 4 times a year

We are to assume the central bank rate is fifty basispoints and will increase by 25 every year for four years

Amortization of set up costs

Hi guys,

If I set up a company or partnership, and incur set up costs, do I get to choose how and how much to amortize these costs, over how many years, and the amount to write off or amortize, or are they accounting guidelines/conventions I have to adhere?

I know that taxation rules regarding amortization may differ from jurisdiction to jurisdiction, but what about the accounting treatment? Do we, as promoters of the company or partnership, have discretion over that?

Regards,

TNOCF is driving me nuts!!!

Knowing the formula hasnt worked for me. Does anyone know what I’m doing wrong:

(550000) + [$187,000/1.12^5] + [$232,500/1.12^5] = $256,020

I cannot figure out how the $187,000 discounted at the rate above is $674,093…

My brain is tired…

Mergers and Acquisitions

Hello,

In the M&A chapter, I have trouble understanding the difference between

1) Leverage Buy-Out (LBO)

2) Leveraged Recapitalization

3) Share repurchase 

Can someone shed the light between them?

Thank you much!

contradiction in share repurchase

direct negotiation : purchase shares from major shareholder at premium over market price. 

this is the solution for  topic test :  Research showed that 45% of private repurchases between 1984 and 2001 were actually made at discounts, indicating that many direct negotiation repurchases are generated by the liquidity needs of large investors who are in a weak negotiating position.

which one is correct?

HHI index question

Working on a mock right now, and this question seems like its an error. Not on errata though.

If a merger of a companies Pre-HHI is 1600 and Post HHI is 2000, change in HHI is 400.

A.) Possible Challenge

B.) Challenge

C.) No challenge

I thought this was obviously B. However, answer is A.

I thought the HHI index chart says to use post-merger category. Since this is over 1800, any increase of 50+ is a challenge, right?

Capital Budgeting

 

Ths pertains to the Capital Budgeting Topic

TNOCF = ( Sale Tnew-Sal T old) +NWC inv -T( Sale Tnew- B Tnew)- (Sale Told-B Told)

Why does TNOCF( Replaceent project) include a deduction for the after tax sale value of the replaced asset when we already deduct the sale value in the initial outlay ?

High dividend yields, good or bad?

Regarding the implication of increasing dividends along the company’s history, I’m a bit confused between two stated parts in the Qbank;

1. High dividend yields compared to the company’s records suggest that investors are expecting dividends to be cut. (So it is a bad signal)

2. Unexpected dividend increases generally signal to investors that a company’s prospects are strong.

I go for the second one but I need someone to clarify the missing part for me please.

Capital Gains & Dividends

I think my brain freezed, so I need help on this although I think it is lame from me.

How would a decrease in the capital gain tax rate prompt a decline in a company’s overall payout ratio. 

How is capital gains related to a company’s dividend distribution, is not capital gain the gain received from a sale of an investment?