Corporate Finance Fundamentals
What is the purpose of Corporate Finance and how do we fulfil this?
maximize value while balancing risk/profitability
1. capital investment
2. capital financing
3. capital return
initial public offering (IPO)
issuing shares in the form of equity to the public for the first time (kind of financing)
follow-on offering
issuing more equity to existing public shareholders (kind of financing)
private placement
issuing shares to a select group of shareholders (kind of financing)
mergers & acquisitions (M&A)
company looks for other companies to invest in
leveraged buyout
a PE firm looks to take a position in your company (kind of financing)
divestiture
putting a company for sale so that other companies can invest in (buy) it
strategic buyer
an operating bussines looking to expand his business and deliver synergies
financial buyer
an investor looking to use leverage to maximize equity returns
capital investment metrics
(discounted) payback period
NPV
IRR
profitability index
business life cycle
launch growth shake-out maturity decline
capital stack
1. senior debt
- revolver
- term loans
2. subordinated debt
- high yield bonds
- vendor notes
3. equity
- preferred shares
- common shares
WACC
COE*(E/D+E) + COD*(1-t)*(D/D+E)
enterprise value vs equity value
EV = E + D - cash
Once you've found the EV from DCF, adjust for debt and add back cash to find the E.
How should you decide between returning and investing capital?
IRR vs WACC
IRR > WACC == invest
IRR < WACC == return