ACFI201 - Week 4

  1. Formula: Future Value
    Image Upload 1
  2. Formula: Present Value
    Image Upload 2
  3. Factor's affecting an Asset's Value
    • Amount, timing and riskiness of expected cash flows
    • Investors assessment of riskiness and their willingness to bear risk
  4. Purpose of Valuation
    • Understand how to value financial securities if you want to meet the objective of maximising the shareholders wealth
    • Assisst a lender in quantifiying the security value for a loan
  5. Formula: Value of an Asset
    Image Upload 3
  6. Features of Common Stock
    • Variable Income Security
    • Represents Equity Ownership
    • Includes voting rights/proxy voting
    • Dividends may be increased or decreased
    • Priority: Lower than debt and preferred shares
    • Common stockholder receive dividends and price appreciation
  7. Common Stock Valuation: Constant Growth/Zero Growth
    • Image Upload 4
    • Growth < Required Rate of Return
    • Zero Growth means EPS = Dividends
  8. Formula: Retention of earnings/ Internal Growth
    • Image Upload 5
    • Where r = % of earnings retained in the firm
  9. Common Stock Valuation: Non-constant growth
    Image Upload 6
  10. Common Stock Valuation: P/E Ratio
    • Image Upload 7
    • EPS carries the level of earnings information
    • P/E carries the risk information
  11. Problems with P/E Multiple Method
    • P/E depends on reported accounting earnings
    • Often hard to find comparable firms
  12. Features of Preferred StockĀ 
    • No fixed maturity
    • Ranks behind bonds but ahead of common stock
    • Most are cumulative meaning any missed preferred stock dividends in any year will have to be paid before dividends can be paid to any common stockholder
    • Does not usually carry voting rights
  13. Formula: Preferred Stock Valuation
    Image Upload 8
  14. Characteristics of a Bond
    • Company is commited to paying coupon and the repayment of principal
    • Only variable causing change in value is investors required rate of return
    • Bond financing is less costly than equity financing because equity holders bear most of the risk and require greater returns. Also the cost of debt is tax deductible whereas dividend(cost of equity) are not tax deductible.
    • Suppliers of debt finance have no control over the affairs of the company apart from those outline in bond indenture
    • May be secured or unsecured
  15. Bond Indenture
    • Lists all the bonds features
    • Describes repayment provisions
    • Lists covenants designed to protect bondholders eg minimum coverage working capital, max dividends
  16. Advantages of Long term debt financing
    • Relatively low cost after tax
    • Leverage Increases EPS
    • Owners maintain control of firm
  17. Disadvantages of Long term debt financing
    • Increase financial risk
    • Restrictions by lenders
  18. Types of Bonds
    • Debentures - unsecured bonds
    • Mortgage Bonds - Secured Bonds
    • Zero Coupon - bonds that only pay par value at maturity, no coupons
    • Eurobonds - Bonds denominated in one currency and sold in another country (benefit is lower interest rates in other country and to avoid domestic regulations)
  19. Formula: Bond Valuation
    Image Upload 9
  20. Premium vs Discount Bonds
    • Coupon Rate = Discount Rate then Bond will sell at par value
    • Coupon Rate > Discount Rate the bond will sell at a premium
    • Coupon Rate < Discount Rate the bond will sell at a discount
  21. Formula: Perpetual Bond
    Image Upload 10
  22. Zero Coupon Bond
    Image Upload 11
  23. Yield to Maturity
    • Rate of return investors earn if they buy the Bond and hold it until maturity
    • YTM on a bond selling at Par will always equal the coupon interest rate
    • YTM is the discount rate that equates the PV of a bonds cash flows with its price.
  24. Call Feature
    An optional retirement provision that permits the issuing company to redeem a debt issue prior to its maturity date.
  25. Dividend YieldImage Upload 12
Card Set
ACFI201 - Week 4
Week 4 Cards