This is a list of concepts that I personally thought were important, however,
rather use this as an overview instead of a summary. Just studying this by heart
will not make you pass! Also make sure you practice enough exercises. 😊
Goodluck!
This summary included chapter 12, 14-20, 22-25 and 30.
Book: corporate finance, 3rd edition, hillier.
When it mentions the formula sheet, it refers to the formula sheet given during
the exam.
Concepts to be studied
Concept: CAPM Use for: Cost of Equity Re -> Rwacc,
1. ℜ=Rf + β ( Rm−Rf ) = Capital Asset Pricing Model
Rm – Rf is called the risk premium
R stands for expected return -> cost of equity/market/risk free rate
Concept: YTM Use for: Rd
1
1−
(1+ r )t FV
P=FV x C x + t
r (1+r )
P = par value fv = face value c = coupon % r = interest rate t = period (years)
Always semi annually! -> in the end, multiply x2 to get annual rate
You can use the annuity table for the marked part of the formula
Concept: Rwacc Use for: NPV, Value of firm
E D
R wacc= x ℜ+ x Rd x (1−Tc)
D+ E E +D
Concept: BETA Use for: CAPM formula
Cov(Ri , Rm)
1. = Beta of security i
Var (Rm)
Problems: 1. Beta’s may vary over time / 2. Sample size may be inadequate / 3. Influenced by financial leverage
(not included)
, Beta is the measure of risk Close to 1 = stable
Determinants of beta are: High beta = volatile = risky
- Cyclicality of revenues Low beta = low risk = often regulated market
- Operating leverage
- Financial leverage
E
2. βe= x βa Beta of equity
E+ ( 1−Tc ) D
Concept: Economic Value Added (EVA) Use for: Determine whether or not to take
on a project, preferred over just ROA
1. ( ROA−Rwacc ) x total capital = Earnings after capital costs
Incorporates that a high return on a large division may be better than a very high return on a smaller division
Critics: 1. Focuses only on current earnings / 2. May increase short sightness of managers
Concept: Long-term financing Theoretical concept
1. Equity
Ordinary shares = equity that has no special preference in either dividends or bankruptcy
Par value = face value, total par value = dedicated/called-up capital of a firm
Authorized shares = number of shares a company can issue, some gov. impose tax based on this and it might
create concerns with investors
Additional paid-in capital = total difference amount paid – par value
Book value = Total equity / shares outstanding
Market value = Share price
Rights of shareholders:
1. The right to share proportionally in dividends
a. Dividends: return on the capital, not a liability, not an expense -> distributed after tax, are
considered as ordinary income by tax authorities
2. … to share proportionally in assets remaining after liabilities have been paid (bankruptcy)
3. … to vote on matters of great importance to them, e.g. mergers.
4. … to share proportionally in any new equity sold = pre-emptive right
2. Debt
Main differences debt & equity:
1. Debt is not an ownership interest in the firm
rather use this as an overview instead of a summary. Just studying this by heart
will not make you pass! Also make sure you practice enough exercises. 😊
Goodluck!
This summary included chapter 12, 14-20, 22-25 and 30.
Book: corporate finance, 3rd edition, hillier.
When it mentions the formula sheet, it refers to the formula sheet given during
the exam.
Concepts to be studied
Concept: CAPM Use for: Cost of Equity Re -> Rwacc,
1. ℜ=Rf + β ( Rm−Rf ) = Capital Asset Pricing Model
Rm – Rf is called the risk premium
R stands for expected return -> cost of equity/market/risk free rate
Concept: YTM Use for: Rd
1
1−
(1+ r )t FV
P=FV x C x + t
r (1+r )
P = par value fv = face value c = coupon % r = interest rate t = period (years)
Always semi annually! -> in the end, multiply x2 to get annual rate
You can use the annuity table for the marked part of the formula
Concept: Rwacc Use for: NPV, Value of firm
E D
R wacc= x ℜ+ x Rd x (1−Tc)
D+ E E +D
Concept: BETA Use for: CAPM formula
Cov(Ri , Rm)
1. = Beta of security i
Var (Rm)
Problems: 1. Beta’s may vary over time / 2. Sample size may be inadequate / 3. Influenced by financial leverage
(not included)
, Beta is the measure of risk Close to 1 = stable
Determinants of beta are: High beta = volatile = risky
- Cyclicality of revenues Low beta = low risk = often regulated market
- Operating leverage
- Financial leverage
E
2. βe= x βa Beta of equity
E+ ( 1−Tc ) D
Concept: Economic Value Added (EVA) Use for: Determine whether or not to take
on a project, preferred over just ROA
1. ( ROA−Rwacc ) x total capital = Earnings after capital costs
Incorporates that a high return on a large division may be better than a very high return on a smaller division
Critics: 1. Focuses only on current earnings / 2. May increase short sightness of managers
Concept: Long-term financing Theoretical concept
1. Equity
Ordinary shares = equity that has no special preference in either dividends or bankruptcy
Par value = face value, total par value = dedicated/called-up capital of a firm
Authorized shares = number of shares a company can issue, some gov. impose tax based on this and it might
create concerns with investors
Additional paid-in capital = total difference amount paid – par value
Book value = Total equity / shares outstanding
Market value = Share price
Rights of shareholders:
1. The right to share proportionally in dividends
a. Dividends: return on the capital, not a liability, not an expense -> distributed after tax, are
considered as ordinary income by tax authorities
2. … to share proportionally in assets remaining after liabilities have been paid (bankruptcy)
3. … to vote on matters of great importance to them, e.g. mergers.
4. … to share proportionally in any new equity sold = pre-emptive right
2. Debt
Main differences debt & equity:
1. Debt is not an ownership interest in the firm
