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Study Session 7: Corporate Finance

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?

Debt and bonds

Why are companies in countries where the use of bank borrowing is relatively more prevalent than the issuance of corporate bonds tend to use more leverage?

Incremental NPV

I am lost on how to go about answering this question. Any assistence would be greatly appreciated!

Reeva Singer, an analyst with Big Lee Corporation (BLC), is evaluating more efficient higher-capacity equipment to replace existing production equipment. “Option A” involves replacing existing equipment with new equipment of identical remaining life. Characteristics of existing and new equipment under Option A appear in Exhibit 1.

Characteristic 

Old Equipment 

New Equipment 

Current BV 

$300,000 

Current MV