CORPORATE FINANCE

1. COST OF CAPITAL:

- Definition:

- Elements: Cost of Debt, Cost of Equity

- Factors affecting: Term (longer term, higher risk); Term to maturity; Opportunity cost.

- Structure:

+ Debt: A/P, Accrual, Notes payable, Loan (more than 1 year), Bond, Convertible.

+ Equity: Preferred stock Common stock.

- CAPM

2. CAPITAL STRUCTURE:

- Required rate of return

- Term

3. PROJECT EVALUATION: FACTORS AFFECTING

- Cash flows:

+ The higher the cash flows, the higher the return.

+ Frequency: annually, quarterly, monthly.

+ In-flow (Sales revenue: volume of sales, price), Out-flow (Equipment; Working

capital: labor, material, production; Depreciation: higher depreciation, lower EBIT -> Lower
tax payment; Initial investment for lands, equipment, facilities, ect.).

- Economics scenarios: Normal (normal inflation, normal growing demands.

Pessimistic Normal Optimistic

(Worst) (Base case) (Best)

Volume Demand decrease Little grow; Stable Steep growing

demand
Price Decrease Growing Price
Effect Total inflow Total inflows
 decrease increase

* Example:

Pessimistic Normal Optimistic

(Worst) (Base case) (Best)

Probability 20% 60% 20%

Volume 100 200 300
Price 20 30 40
Effect 2000 6000 12000
EXPECTED = 20% x 2000 + 60% x 6000 + 20% x 12000

- Risk involved:

+ Different projects -> different risk levels -> use different RRR as discount rate to
determine NPV.

+ RRR = Risk level x (Rm-Rf) + Rf.

+ The higher the risk, the higher the RRR -> the lower the present value of CF.

- Interest rate: Firm borrowed money from bank for project.

+ High fluctuation -> Uncertainty of PV.

+ Interest rate grows up -> PVs of CFs go down -> Margin of project goes down.

- Term: Longer project: higher risk, higher RRR.

-> PV of FV goes down -> Higher provision, reduce margin + Lower NPV.

1.Cost of Capital: How you define it? What are the

factors affecting cost of capital
2. What is the Capital Structure? How capital structure affects the cost of capital
3. What are factors affecting your project evaluation?
4. How you monitor and control the financial risks of
project?
5. Principle of Bond valuation, Stock Valuation. Factors affecting valuation? Factors affecting
investment performance?