Corporate Issuers

What is the objective of capital budgeting?

Invest in positive-NPV projects that increase firm value.

Define NPV.

Present value of incremental after-tax cash inflows less initial investment.

Why might IRR conflict with NPV?

Differences in project scale, timing, reinvestment assumptions or nonconventional cash flows.

What does WACC represent?

Weighted required return for providers of debt and equity for matching-risk project cash flows.

How is after-tax cost of debt computed?

Pretax debt cost × (1 − marginal tax rate), assuming deductible interest.

What is the CAPM cost of equity?

Risk-free rate + equity beta × equity risk premium.

What is marginal cost of capital?

Cost of obtaining one additional unit of financing, possibly increasing in steps.

What is a target capital structure?

Intended sustainable mix of debt and equity financing.

When should a project use different discount rate from company WACC?

When project risk differs materially from average company operations.

What is operating leverage?

Sensitivity of operating profit to changes in sales owing to fixed operating costs.

What is financial leverage?

Sensitivity of equity earnings/returns to financing with fixed obligations.

What is residual dividend policy?

Fund value-creating investment needs first, then distribute remaining cash.

Dividend payment impact on ex-dividend price, all else equal?

Price typically falls by roughly the dividend amount, adjusted for taxes and market effects.

What is share repurchase's mechanical effect on share count?

Shares outstanding decline if repurchased shares are retired or held as treasury shares.

Why can EPS rise after repurchases without value creation?

Lower share count alone can raise EPS, depending on financing and lost investment income.

What is a stock split's effect on firm value mechanically?

No intrinsic enterprise value creation; price per share and shares adjust proportionally.

What is a corporate governance agency problem?

Managers or controlling shareholders may act against interests of other owners or stakeholders.

What is shareholder activism?

Investor engagement or intervention to influence governance and capital allocation.

What is ESG materiality?

Environmental, social or governance factor reasonably capable of affecting financial performance/value.

What is economic value added (EVA)?

NOPAT minus WACC times invested capital (appropriately measured).

What is restructuring?

Material redesign of assets, operations, financing or ownership to improve value.

What is a divestiture?

Sale, spin-off or separation of a business unit or assets.

What is a spin-off?

Distribution of subsidiary shares to existing parent shareholders.

What is synergy in acquisition?

Combined value exceeding sum of standalone values, net of implementation costs.

What is an acquisition control premium?

Amount paid above unaffected market valuation for control; not automatically equal to value of synergies.

What is the basic dividend payout ratio?

Dividends paid to common shareholders / net income available to common.

What is the dividend coverage ratio based on net income?

Net income available to common / common dividends paid.

What is the cash-flow dividend coverage ratio?

Relevant free cash flow / cash dividends, with consistent definitions.

What is a stable dividend policy?

Targets predictable dividends, adjusting gradually as sustainable earnings change.

What is a constant payout policy?

Pays a fixed proportion of earnings, so dividends fluctuate with earnings.

What is the residual dividend method?

Dividends equal earnings less equity financing needed for acceptable projects, subject to constraints.

What does double taxation of dividends mean?

Corporate profit taxed then investors taxed on distributed dividends.

What is dividend imputation?

Shareholders receive a credit for some corporate taxes paid on profits distributed.

What is a split-rate corporate tax system?

Different corporate tax rates apply to retained versus distributed profits.

When is a cash-financed buyback EPS accretive?

Earnings yield of repurchased shares exceeds after-tax yield forgone on cash used, all else equal.

When is a debt-financed buyback EPS accretive?

Earnings yield on repurchased shares exceeds after-tax borrowing cost, all else equal.

How does buyback price relative to BVPS affect new BVPS?

Buying above pre-buyback BVPS lowers BVPS; buying below raises it, other things equal.

How do tender-offer and open-market buybacks differ?

Tender announces price/quantity to holders; open-market buys shares through trading.

What information can an unexpected dividend cut signal?

Reduced confidence in sustainable cash generation or changed investment needs; context matters.

What is bottom-up beta estimation?

Estimate peer business beta, unlever, then relever to target capital structure.

What is the approximate unlevered beta without debt beta?

beta_U = beta_E/[1+(1-tax rate)(D/E)].

What is the approximate relevered beta without debt beta?

beta_E = beta_U[1+(1-tax rate)(D/E)].

How does a private-company build-up cost-of-equity model work?

Start risk-free rate, add market, size, industry, and justified company-specific premiums.

What is the implied equity risk premium?

Discount rate premium over risk-free rate consistent with observed price and expected equity cash flows.

Why can historical equity risk premium misestimate future return?

Sample selection, regime changes, and forward expectations may differ.

Which discount rate belongs with FCFF in M&A valuation?

WACC appropriate to the target's risks and intended financing structure.

What is a sum-of-the-parts valuation?

Value constituent operating businesses separately, adjust corporate items and debt/claims.

What is the enterprise-value merger synergy calculation?

Combined firm value minus standalone acquirer and target values before transaction costs.

What is an EPS accretion-dilution analysis?

Compare forecast EPS after a transaction with acquirer's standalone forecast EPS.

What is a split-off versus a spin-off?

Split-off exchanges parent shares for unit shares; spin-off distributes unit shares broadly.

What is an equity carve-out?

Parent sells a minority stake in subsidiary to public investors, often retaining control.

What is a divestiture's potential effect on leverage?

Net debt/EBITDA may rise or fall depending on sale proceeds used and EBITDA lost.