Questions tagged [corporate-finance]
The corporate-finance tag has no usage guidance.
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Why is the Modigliani-Miller theorem logical?
Quoting this SE question, who put it nicely, the M&M theorem basically states that:
...in a no-frictions world, two identical firms have the same enterprise
value, regardless of their financial ...
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How to prove the value of a European Call Option is convex on the underlying’s price?
I know the payoff of a European Call at expiration is $\max\{S_T - K,0\}$, where $S_T$ is the underlying price at expiration and $K$ is the strike price.
I want to prove convexity of the value of a ...
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Why would a company file for bankruptcy now when it can always do so later?
Taking FTX as an example, I know they took depositors' funds, send them to SBF's other company Alameda Research which then made risky crypto investments and failed.
This made FTX hold less assets than ...
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Does doing nothing produce negative net present value? How can we show that?
When evaluating investment projects, a popular approach is to calculate the net present value (NPV). A positive NPV suggests carrying out the project is better than not doing that, in light of the ...
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Impact of the corporate tax rate on the cost of equity (Modigliani & Miller Proposition II)
Consider Modigliani & Miller Proposition II with corporate taxes. The cost of equity is
$$
R_E=R_U+(R_U-R_D)\cdot \frac{D}{E}\cdot (1-T_C) \tag{1}
$$
where $R_E$ is the cost of equity, $R_U$ is ...
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Confused about the idea and purpose of stock dividends
According to chapter 16 of Hillier et al. "Fundamentals of Corporate Finance" (3rd ed., 2017) (here is a link to a slightly different edition), instead of paying a cash dividend a company ...
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Dividend policy in terms of net profit or free cash flow?
Is dividend policy usually formulated in terms of net profit or free cash flow (to equity)? Simplifying, which one would be more common:
Pay out 50% of net profit for the year/quarter
or
Pay out 50%...
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Effect of tax on required return on debt (and equity)
Debt financing has a tax advantage over equity financing, as the borrower gets reimbursed the tax on interest payments and other debt-servicing costs. Thus
$$
R_{\text{WACC}}=\frac{E}{E+D}R_E+(1-T_C)\...
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Does this example involving WACC make sense?
I have encountered the following example in the context of cost of capital:
A firm is considering investing into a project that has the same risk profile as the rest of the firm's projects. It may ...
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Cost of debt: How to adjust YTM for the possibility of bankruptcy?
When calculating the weighted average cost of capital (WACC), it may be tempting to use the debt yield (yield to maturity, YTM) as the cost of debt. However, Berk & DeMarzo note in Chapter 12 of &...
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WACC: forward looking vs. backward looking
I have learned from the thread "Cost of debt, taxes and WACC" that WACC is forward looking in that it disregards the interest rate on debt already taken by the firm but rather use debt's ...
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Cost of debt, taxes and WACC
I am studying the cost of debt. Without loss of generality, suppose the debt consists of bonds. On the one hand, some textbooks (e.g. Hillier et al. "Fundamentals of Corporate Finance: 4th ...
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Modigliani & Miller with taxes: how is this equation derived?
I am looking at Modigliani & Miller Proposition II with corporate taxes. According to Hillier et al. "Fundamentals of Corporate Finance" (3rd ed., 2017) (here is a link to a slightly ...
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Real world price elasticity when making pricing decisions
This is my first time trying to calculate price elasticity and put it to work in a real world situation. Let me state my problem first:
I work at a company (let’s call it a store) that was selling a ...
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Understanding Modigliani & Miller: different graphs in different textbooks
I am comparing two textbook's presentations of capital structure and Modigliani & Miller propositions. The first one is Berk & DeMarzo "Corporate Finance" (5th global ed., 2019), the ...
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Is Theodore Levitt's concept of 'marketing myopia' flawed?
Theodore Levitt's article published in Harvard Business Review says that people do not want quarter-inch drills, they want quarter-inch holes. This line of thought probably emerges from a line of ...
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Shareholder oppression, venture "growth at all costs", and bubbles
Are "lifestyle businesses" more substantially likely to remain closely held corporations and commit shareholder oppression (business judgment rule)?
If so, does this have a substantial ...
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What is the market capitalisation of the crypto exchange Binance?
Cryptocurrency exchange FTX has raised USD 400 million in a Series C fundraise, helping bump up the company's valuation to $32 billion (1 Feb 2022). What is Binance company valuation? Not BNB market ...
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Need help with numerical implementation of a model
I am toying around with a capital structure model that looks as follows:
$\sup_{D_{t}(A_{t}),K_{t}}\int_{B_{L}}^{B_{H}}(1-\kappa_{t})\pi(t,A_{t},K_{t},B_{t})g_{t}(B_{t})dB_{t}+\kappa_{t}D_{t}(A_{t})[1-...
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What does it mean by the statement "a corporation looses money if it produces more than its value"
Recently I was reading a book on corporate finance titled "corporate finance for dummies". Here in the introduction page the author has given a definition for corporate finance, followed by ...
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Who are the largest customers of the Vanguard group?
According to Wikipedia, Vanguard is owned by its customers. Is there a list available of the largest customers of the Vanguard group?
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Connection assets under management and net worth
Could you help me to understand the connection between assets under management and net worth?
In my understanding, if a corporation has $X$ dollars Assets Under Management, and if a shareholder owns $...
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Why is having a big corporation keep its money in foreign countries a bad thing in the public's eye?
I have been trying to dig deeper into corporate tax evasion, and how it works, to really determine if they're doing something bad or what. I don't know much about economics or politics, but I hear ...
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Is the yield on high coupon-bonds more likely to be higher than on low-coupon bonds when the term structure is upward or downward sloping?
Currently I'm learning about the principles of corporate finance. More specifically I'm learning about valuing bonds. I have the follow question:
Is the yield on high coupon-bonds more likely to be ...
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Shouldn't big tech want to split up?
This is a reference request.
Where can I find an analysis that explains why companies like Microsoft and Amazon don't split into two. At a certain point diseconomies of scale would kick in.
I would ...
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Calculating Tobin's q from the financial statements of publicly listed companies
I'm interested in doing some empirical analysis of firm's investment behavior using financial statements (such as asset, working capital, operating cost, etc). One variable I want to manually ...
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where can I download financial statements (or financial data) for firms in many industries in one shot?
I'm interested in doing some empirical analysis of firm's financial statements (such as asset, working capital, operating cost, etc) for many firms across industries over the past few years. Where can ...
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Is there any reference for labour finance?
Is there any recent reference for labour finance, in which labour finance relating to financial statements? And what are the alternative name for "labour finance"?
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How to justify the treatment and control groups for Difference-In-Difference with staggered implementation of laws?
A. Background:
Dong, 2019 and Dasgupta, 2019 used the same way to generate the treatment and control groups because they all learn about the impact of the same laws on different dependent variables. I ...
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Shouldn't corporate tax be calculated based on EBIT instead of EBT?
When I was studying Corporate Finance in university, I was surprised to learn that it is more advantageous for corporations to take more debt (even if they don't need to) because it creates tax shield ...
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Bankruptcy Vs default
If a company files for bankruptcy, how come its stock still trades ?
E.g. On June 17, Wirecard was valued at more than $14 billion. Eight days later, it filed for the German equivalent of bankruptcy. ...
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Would the market stabilize if companies paid taxes on revenue instead of gross income?
Note: there is a closed question that is similar (https://money.stackexchange.com/questions/126677/paying-taxes-revenue-vs-taxes-profit) but the response offers a perspective that I would like to ...
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Why might it make sense to buy bonds in a company facing restructuring?
In this video, Sal Khan states, "If you really thought that Lehman Brothers in the long term was going to come back, what you might want to do is somehow try to become one of its bondholders, and ...
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Where to learn financial modelling concepts and skills?
I'm looking to learn more about the financial analysis of a business. Things like unit economics calculation, income statement, free cash flow analysis, a valuation calculation, etc.
Can you recommend ...
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Does development aid, negatively effect the development of developing countries?
Development aid
Development aid or development cooperation (also development assistance, technical assistance, international aid, overseas aid, official development assistance (ODA), or foreign aid) ...
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Why is the ECB asking EU banks to hold off on buybacks?
In the wake of the Covid-19 pandemic, the ECB requested EU banks not to pay dividends as well as refraining from buying back their own shares until the end of 2020. And that even if they had already ...
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Why is a company allowed to change the number of shares it’s divided into after its IPO?
I read that even after an IPO, a company can change the number of shares that it’s divided into based on a board vote. What’s to prevent them from arbitrarily increasing the number of shares to raise ...
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What does Eugene Fama mean "the amount of debt that's financed with equity isn't put aside"?
I transcribed A Symposium with 2013 American Nobel Laureates at Embassy of Sweden, Washington - YouTube starting at 56:00.
The moderator, AAAS CEO Alan Leshner, claims
Locking up that kind of money ...
user4020
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Why is it relevant for a company to use dividends to incentivize shareholders to maintain ownership of the company's stocks?
I was reading the definition of "Bottom Line" on Investopedia and one of the reasons companies increase their bottom-line is to issue payments (dividends) to stockholders as an incentive to ...
user27846
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Who holds the Reverse Repo and Repo respectively in a Repurchase Agreement?
According to investopedia.com in this definition
A reverse repurchase agreement, or "reverse repo", is the purchase of
securities with the agreement to sell ...
user27846
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Risk neutral probability for each of 3 states
I need help to find the risk-neutral probability for states 1,2 and 3
I have two stocks: A and B.
The price of A today is 180 and in a year it will be worth 288 (S1), 180 (S2) or 120 (S3);
The ...
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Economic Profit and the Return on Invested Capital
In my finance classes, I always learned that the a firm earning an "economic profit" is one for which its return on invested capital (ROIC) is greater than it's opportunity cost of capital (usually ...
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Does a private company that is 100% financed by a bank loan have a WACC equal to the interest rate?
When estimating a company's Cost of Debt for a Weighted Average Cost of Capital (WACC) calculation we normally look into its bond yield. But for a private company with 100% debt capital structure, ...
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Financial Economics and Corporate Finance
In pg 4 of Principles of Corporate finance (Allen et al, 2017), in the context of explaining financing decisions are less important that investment decisions, there is a line that says:
"Financial ...
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Corporate Finance Book Recommendations
Can you share your recommendations for corporate finance if you have any?
A slightly more detailed version would be better:
For example, something like:
Advanced Undergrad: Varian's $\textit{...
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How to calculate capital investment?
So i have this question:
After spending 3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of 6 million. This ...
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Interpeting equivalent annual cash flows
So i have this question:
RainMan Inc. is in the business of producing rain upon request. They must decide between two investment projects; a new airplane for seeding rain clouds or a new weather ...
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Relevance of change in Inventory in calculation of Free Cash Flow
Free cash flow (FCF) can be obtained by
$$
\text{FCF}=(\text{Revenues}-\text{Cost}-\text{Depreciation})(1-\tau)+\text{Depreciation}-\text{Capital Expenditures}-\Delta(\text{Net Working Capital})
$$
...
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Does commercial paper usually carry a higher yield than corporate bonds? Why?
In Banking: A Very Short Introduction, Goddard and Wilson write:
[Commercial paper] usually carries a higher yield than corporate bonds.
But aren't corporate bonds longer term than commercial ...
user20317
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Can corporate tax loss carryforward function like a sort of insurance policy?
I'm a graduate student in mathematics, with a casual knowledge of economics, so please let me know if this question is a non-sequitur or off base.
Here's the intuition I'm trying to capture: Suppose ...
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