Tìm hiểu về lý thuyết môn Corporate Finance (CF2033) - tài liệu tham khảo | Đài học Hoa Sen

1. PURPOSES OF USING CAPM
The Capital Asset Pricing Model (CAPM) is a widely used financial model that provides a
framework for estimating the expected return on an asset, typically a stock or portfolio of stocks. The
main purposes of using CAPM are:
1. Estimating the cost of equity: CAPM is commonly used to estimate the cost of equity, which is
the rate of return that investors expect to earn on their investment in a company's stock. This is an
important input for financial decision-making, such as determining the appropriate discount rate for
valuing a company, evaluating potential projects or investments, or deciding on a company's optimal capital structure.
2. Assessing the risk-return tradeoff: CAPM provides a framework for evaluating the risk-return
tradeoff of an investment. The model assumes that investors require higher returns for taking on higher
levels of risk. By estimating the expected return of an investment using CAPM, an investor can assess
whether the potential return justifies the risk of the investment. This is important in making investment
decisions, where investors need to evaluate whether the potential return of an investment justifies the risk
of investing in that particular asset.
3. Evaluating investment opportunities: CAPM can also be used to evaluate different investment
opportunities. By using the model to estimate the expected return and risk of different investment
opportunities, investors can compare and select the best investment option that provides the desired level of risk and return.
4. Portfolio management: CAPM can be used to guide portfolio management decisions. An
investor can use the model to estimate the expected return and risk of different stocks or portfolios of
stocks, and then use this information to construct a portfolio that provides the desired level of risk and
return. By doing so, investors can optimize their portfolio to achieve their investment objectives.
5. Capital budgeting: CAPM can also be used in capital budgeting decisions. By using the model
to estimate the expected return and risk of potential projects or investments, companies can determine
whether the potential return justifies the risk of the investment. This can help companies in making capital
budgeting decisions, such as deciding on which projects to invest in.
Overall, the Capital Asset Pricing Model is a widely used and well-regarded model for estimating
the cost of equity and assessing the risk-return tradeoff of an investment. It is a valuable tool for financial
decision-making, portfolio management, and capital budgeting. 2. PURPOSES OF WACC
WACC, or Weighted Average Cost of Capital, is used to determine the minimum return that a
company must earn on its investments to satisfy all of its investors and lenders. WACC is calculated by
weighting the cost of equity and the cost of debt according to their respective proportions in the company's capital structure.
1. WACC is used for several purposes: Investment decisions: WACC is used as a benchmark for
evaluating investment opportunities. If the expected return on an investment is higher than the WACC, the
investment is considered acceptable. Conversely, if the expected return is lower than the WACC, the
investment may not be financially viable.
2. Capital budgeting: WACC is used in capital budgeting decisions to determine the net present
value (NPV) of potential investments. The NPV is the difference between the present value of the 1
investment's expected cash flows and its initial cost. If the NPV is positive, the investment is considered financially viable.
3. Cost of capital: WACC is used to determine the cost of financing the company's operations and
investments. This cost of capital represents the minimum return that a company must earn on its
investments to satisfy all of its investors and lenders.
4. Valuation: WACC is used to calculate the enterprise value of a company. Enterprise value is the
total value of a company's equity and debt, and is used in the valuation of companies for mergers and
acquisitions, and in determining the value of equity and debt securities.
5. Setting financial targets: WACC is also used to set financial targets for a company, such as
return on investment (ROI) and return on equity (ROE). By using WACC as a benchmark, a company can
set targets that are realistic and achievable, while still providing an acceptable return for its investors.
6. Strategic planning: WACC can be used in strategic planning by evaluating the impact of
potential changes in the company's capital structure or cost of capital on its operations and investments.
Overall, WACC is a crucial financial metric that is used by businesses and investors to evaluate
potential investments, make financing decisions, and set financial targets. 3.
PURPOSES OF USING COST OF DEBT AND OF COST OF EQUILITY
The purposes of analyzing the cost of debt and cost of equity are different, and both are important
for companies to understand when making financial decisions.
The cost of debt represents the interest rate a company must pay to borrow money through issuing
debt. The primary purposes of analyzing the cost of debt are:
1. To evaluate the affordability of debt: A company can use the cost of debt to determine whether it
can afford to take on more debt. This analysis can help the company avoid financial distress by not taking
on too much debt that it cannot service.
2. To compare financing options: A company can compare the cost of debt to the cost of equity to
determine which financing option is more affordable. Generally, debt is cheaper than equity because
interest payments are tax-deductible, but taking on too much debt can lead to financial distress.
3. To determine the weighted average cost of capital (WACC): The cost of debt is one component
of WACC, which is the average cost of all the sources of capital a company uses. A company can use
WACC to determine the minimum rate of return it needs to earn on a project to create value for shareholders.
On the other hand, the cost of equity represents the return that shareholders require in order to
invest in a company. The primary purposes of analyzing the cost of equity are:
1. To determine the cost of raising equity capital: A company can use the cost of equity to estimate
the cost of issuing new shares of stock to raise capital. The cost of equity is generally higher than the cost
of debt because equity investors bear more risk.
2. To evaluate investment opportunities: A company can use the cost of equity as the minimum
acceptable rate of return on a potential investment project. If the expected return on the project is lower
than the cost of equity, the company may choose not to pursue the project.
3. To determine the weighted average cost of capital (WACC): The cost of equity is one component
of WACC, which is the average cost of all the sources of capital a company uses. A company can use
WACC to determine the minimum rate of return it needs to earn on a project to create value for shareholders. 2
Overall, both the cost of debt and cost of equity are important financial metrics that can impact a
company's profitability, creditworthiness, and strategic decision-making. 4. PURPOSES OF NPV
Net Present Value (NPV) is a financial metric that measures the present value of expected cash
inflows minus the present value of expected cash outflows over a given period of time. The primary purposes of analyzing NPV are:
1. Investment decisions: Companies use NPV to evaluate the profitability of potential investment
projects. If the NPV of a project is positive, it indicates that the project is expected to generate a return
greater than the cost of capital and therefore may be a good investment.
2. Capital budgeting: NPV is a key metric in capital budgeting, which involves allocating financial
resources to investment projects. Companies use NPV to compare different investment projects and
prioritize them based on their expected returns.
3. Cost-benefit analysis: NPV can be used to evaluate the costs and benefits of different options,
such as choosing between different suppliers or investing in different technology solutions. By comparing
the NPV of different options, companies can make more informed decisions.
4. Financial planning: NPV is an important component of financial planning and forecasting.
Companies can use NPV to estimate the future cash flows associated with different investment projects
and to develop financial projections for the future.
Overall, NPV is a versatile financial metric that can be used in a variety of contexts to evaluate
potential investments, prioritize investment projects, and make informed decisions about allocating financial resources. 5.
The company president has approached you about Botanical’s capital structure. He wants
to know why the company doesn’t use more preferred stock financing, since it costs less than
debt. What would you tell the president?
While it is true that preferred stock costs less than debt, it also has some disadvantages compared
to debt financing. Preferred stock dividends are not tax-deductible, which makes the cost of preferred
stock financing higher than debt financing on an after-tax basis. Additionally, preferred stockholders have
priority over common stockholders when it comes to receiving dividends, which can limit the flexibility
of the company in terms of dividend payments. Finally, preferred stock is more expensive to issue than
debt, which can increase the transaction costs associated with raising capital. Therefore, a company needs
to balance the advantages and disadvantages of each financing option before deciding on its optimal
capital structure. In the case of Botanical, it has chosen a mix of common stock, preferred stock, and debt
that aligns with its target capital structure and provides a reasonable cost of capital. 6.
For each group, choose one company that issue bond and answer the following questions
What should you know before investing in bond at the stock market of Vietnam
What is the risks in this bond investing?
Group: Vietnamese government bond
Company: State Treasury of Vietnam 3
Before investing in Vietnamese government bonds through the State Treasury of Vietnam, investors
should be aware of the following: 1.
Credit rating: Investors should evaluate the creditworthiness of the Vietnamese government to
assess the likelihood of default on the bonds. 2.
Interest rate risk: Changes in interest rates can impact the value of the bonds. Investors should
understand how the bonds are affected by changes in interest rates. 3.
Liquidity: Investors should consider the liquidity of the bonds, including the ease of buying and
selling them on the secondary market. 4.
Currency risk: Vietnamese government bonds are denominated in Vietnamese dong, so investors
should be aware of currency risk and its potential impact on returns.
The main risk associated with investing in Vietnamese government bonds is credit risk. While the
Vietnamese government has a relatively stable credit rating, there is still a risk of default or non-payment.
In addition, changes in interest rates can impact the value of the bonds, and investors may face liquidity
and currency risks when investing in Vietnamese government bonds. As with any investment, investors
should carefully evaluate the risks before investing in Vietnamese government bonds. Group: Corporate bond Company: Vietcombank
Before investing in corporate bonds issued by Vietcombank, investors should be aware of the following: 1.
Credit rating: Investors should evaluate the creditworthiness of Vietcombank to assess the
likelihood of default on the bonds. 2.
Financial performance: Investors should review Vietcombank's financial statements to evaluate its
ability to generate revenue and profits. 3.
Industry risk: Investors should evaluate the risks associated with the banking industry in Vietnam,
including changes in regulations and competition from other banks. 4.
Liquidity: Investors should consider the liquidity of the bonds, including the ease of buying and
selling them on the secondary market.
The main risk associated with investing in corporate bonds issued by Vietcombank is credit risk. The
bank has a relatively strong credit rating, but there is still a risk of default or non-payment. In addition,
changes in interest rates and financial performance of the bank can impact the value of the bonds.
Investors may also face liquidity risks when investing in corporate bonds. As with any investment,
investors should carefully evaluate the risks before investing in corporate bonds issued by Vietcombank. 7.
For each group, choose one company that issue stock and answer the following questions
What should you know before investing in stock at the stock market of Vietnam
What is the risks in this stock investing? Group: Blue-chip stocks Company: Vietcombank (VCB)
Before investing in blue-chip stocks like Vietcombank (VCB) on the stock market of Vietnam,
investors should be aware of the following: 1.
Financial performance: Investors should review the financial statements of the company to
evaluate its ability to generate revenue and profits. 4 2.
Industry risk: Investors should evaluate the risks associated with the banking industry in Vietnam,
including changes in regulations and competition from other banks. 3.
Market risk: The stock market of Vietnam can be volatile, and investors should be aware of
market risk and how it can impact the value of their investments. 4.
Governance: Investors should review the governance practices of the company to evaluate its
transparency and accountability to shareholders.
The main risk associated with investing in blue-chip stocks like Vietcombank is market risk. The stock
market of Vietnam can be volatile, and investors may face significant losses if the market experiences a
downturn. In addition, investors should be aware of the specific risks associated with the banking industry
in Vietnam, including changes in regulations and competition from other banks. As with any investment,
investors should carefully evaluate the risks before investing in blue-chip stocks on the stock market of Vietnam. Group: Small-cap stocks
Company: Vietnam Dairy Products JSC (VNM)
Before investing in small-cap stocks like Vietnam Dairy Products JSC (VNM) on the stock market of
Vietnam, investors should be aware of the following: 1.
Financial performance: Investors should review the financial statements of the company to
evaluate its ability to generate revenue and profits. 2.
Industry risk: Investors should evaluate the risks associated with the dairy industry in Vietnam,
including changes in consumer preferences and competition from other companies. 3.
Liquidity: Small-cap stocks may be less liquid than blue-chip stocks, and investors may face
difficulty buying and selling shares on the stock market of Vietnam. 4.
Governance: Investors should review the governance practices of the company to evaluate its
transparency and accountability to shareholders.
The main risk associated with investing in small-cap stocks like Vietnam Dairy Products JSC is
liquidity risk. Small-cap stocks may be less liquid than blue-chip stocks, and investors may face difficulty
buying and selling shares on the stock market of Vietnam. In addition, investors should be aware of the
specific risks associated with the dairy industry in Vietnam, including changes in consumer preferences
and competition from other companies. As with any investment, investors should carefully evaluate the
risks before investing in small-cap stocks on the stock market of Vietnam. 8. PURPOSES OF CAPITAL
The cost of capital is used by businesses and investors to evaluate potential investments and make
decisions about financing. It represents the minimum rate of return that a company must earn on its
investments to satisfy its investors, including both equity and debt holders.
For businesses, the cost of capital is used to determine which investment opportunities are
financially viable and to decide how to finance those investments. If the cost of capital for a particular
investment is higher than the expected return, the investment is not financially feasible. Businesses may
also use the cost of capital to set prices for products or services, since the cost of capital represents the
opportunity cost of using the company's resources for one investment rather than another.
For investors, the cost of capital is used to evaluate the risk of a potential investment and to decide
whether the expected return is sufficient to justify the risk. Investors may also use the cost of capital to
compare the potential returns of different investments and to allocate their portfolios accordingly. 5 9.
Give examples of the investment and financing decisions that financial managers make
Financial managers make various investment and financing decisions that impact a company's
financial position, growth, and profitability. Here are some examples of investment and financing decisions:
1. Investment Decisions: Financial managers make investment decisions to allocate funds in long-term
assets that generate returns. Examples of investment decisions include:
Capital Budgeting: Deciding which long-term projects to invest in and allocate capital to, such as new
equipment or expansion of facilities.
Mergers and Acquisitions: Assessing whether acquiring or merging with another company is
financially viable and will generate returns.
Stock and Bond Investments: Deciding whether to invest in stocks or bonds of other companies to generate returns.
2. Financing Decisions: Financial managers make financing decisions to raise capital to fund
investments and operations. Examples of financing decisions include:
Debt Financing: Raising capital by borrowing money, such as issuing bonds or taking out loans.
Equity Financing: Raising capital by selling company ownership through issuing stocks or equity investments.
Dividend Decisions: Deciding how much of the profits to distribute as dividends to shareholders and
how much to retain for reinvestment in the company.
Overall, investment and financing decisions are crucial in determining a company's financial health and long-term success. 10.
What investments should the corporation make?
The decision of what investments a corporation should make involves evaluating potential projects or
opportunities that will generate the highest return on investment while considering various factors such as
the company's risk tolerance, financial resources, and strategic goals. Some common methods used to
evaluate investment opportunities include:
Net Present Value (NPV): This method compares the present value of expected cash inflows from an
investment to the initial cash outflow required to make the investment. If the NPV is positive, the
investment is considered profitable.
Internal Rate of Return (IRR): This method calculates the discount rate that makes the net present
value of an investment's cash inflows equal to the initial investment outflow. The higher the IRR, the
more profitable the investment.
Payback Period: This method determines the amount of time it takes to recover the initial investment
through the cash inflows generated by the investment. 11.
How should a company pay for these investments?
There are two main methods for a company to pay for investments: debt financing and equity financing.
Debt financing involves borrowing money from lenders or issuing bonds, and the company makes
regular interest and principal payments until the debt is repaid. The advantage of debt financing is that the 6
interest payments are tax-deductible, and the company retains full ownership and control over the business.
Equity financing involves selling ownership in the company to investors in exchange for capital. The
advantage of equity financing is that it does not require regular interest or principal payments, and
investors share the risk and rewards of the business. However, equity financing dilutes the ownership and control of the company.
Ultimately, the decision of how to pay for investments depends on the company's financial situation,
risk tolerance, and goals. A financial manager may consider factors such as the cost of capital, debt-to-
equity ratio, and the availability of funding when deciding on the optimal financing method for a particular investment. 12. FIRST MARKET:
The first market, also known as the primary market, is the market in which securities are issued for the
first time, and the original sale of a company's securities takes place. In this market, companies raise
capital by selling newly issued securities to the public, usually through an initial public offering (IPO).
Investors who participate in the first market are typically institutional investors or wealthy individuals
who purchase large blocks of securities directly from the issuing company or its underwriters. 13. SECOND MARKET:
The second market, also known as the secondary market, is the market in which securities that have
already been issued are bought and sold between investors. This market provides a platform for investors
to trade securities that are already in circulation, such as stocks, bonds, and options. Examples of
secondary markets include stock exchanges like the New York Stock Exchange (NYSE) and Nasdaq. In
the secondary market, securities are bought and sold among investors, and the proceeds from the sale go
to the investor who is selling the security rather than the issuing company. 14.
Why do debt securities with identical terms to maturity, but which are issued by different
firms have different rates of return/yield?
Debt securities with identical terms to maturity but issued by different firms have different rates of
return/yields due to variations in credit risk, liquidity risk, and market demand. These factors influence
the perceived risk associated with the debt security, which in turn affects the required rate of return by investors. 15.
Why do debt securities with same terms issued by the same firm differing only in maturity
have different rates of return/yield?
Debt securities with the same terms issued by the same firm but differing only in maturity have
different rates of return/yields due to differences in the time value of money and the shape of the yield
curve. Investors typically require a higher rate of return/yield for debt securities with longer maturities to
compensate for the additional risk associated with holding the investment over a longer period.
Additionally, the yield curve may be upward-sloping, reflecting the market's expectation of future interest
rates and resulting in higher yields for longer-term debt securities. CHAPTER 01 16.
List and briefly describe the three general areas of responsibility for a financial manager. 7 The three basic areas are:
1. capital budgeting: the identification of investment opportunities that have a positive net value
2. capital structure: the mix of long-term debt and equity used to finance a firm's operations
3. working capital management: the daily control of a firm's short-term assets and short-term liabilities 17.
Describe the key advantages associated with the corporate form of organization.
The advantages of the corporate form of organization are the ease of transferring ownership, the
owners' limited liability for business debts, the ability to raise large amounts of capital, and the
potential for an unlimited life for the organization. 18.
Why are so many businesses structured as sole proprietorships when the corporate form of
business offers more advantages?
A significant advantage of the sole proprietorship is that it is inexpensive and easy to form. If the sole
proprietor has limited capital to start with, it may not be desirable to spend part of that capital forming
a corporation. Also, limited liability for business debts may not be a significant advantage if the
proprietor has most of his or her personal assets tied up in the business already. Finally, for a typical
small firm, having an unlimited life for the business has no real advantage since the heart and soul of
the business is the person who founded it, thereby effectively limiting the life of the business to that of its founder. 19.
What concerns might a loan officer have when loaning funds to a sole proprietorship that
he or she might not have when loaning funds to a corporation?
The existence and viability of a sole proprietor is dependent upon one individual. Should that
individual die, the entity would cease to exist. Likewise, should the owner lose interest in the business
or become ill, the business might also cease to exist. With a corporation, the company ownership
could be sold in any one of those situations such that the business entity would continue to exist. 20.
From a liability point of view, what is the difference between investing in a sole
proprietorship and a general partnership?
Both a sole proprietor and a general partner have unlimited liability for the firm's debts. However, as a
sole proprietor you should be totally aware of all the business dealings of the firm. In a general
partnership, you may or may not handle the financial transactions and thus are accepting the
responsibility for actions taken not only by yourself, but those of your partners. 21.
Give some examples of ways in which manager's goals can differ from those of shareholders.
The primary goal of a financial manager should be to maximize the current value of the outstanding
stock. This goal focuses on enhancing the returns to stockholders who are the owners of the firm.
However, managers frequently are more concerned with their personal benefits from employment, the
prestige of their position, and the perks to which they feel entitled. There are numerous examples,
some of which are excessive compensation packages, large corporate offices, excessive staffing, and
first-class travel and conference locations, to name a few. 8 22.
How might agency problems arise in partnerships?
Agency conflicts typically arise when there is a separation between the ownership and the
management of a business. In a general partnership, especially if the partnership is small, there is less
of a chance of an agency conflict if all the partners are involved with the business on a regular basis.
However, in a limited partnership, the opportunity exists for an agency problem to arise between the
general and the limited partners. 23.
What advantages and disadvantages does the corporate form of organization have
compared to sole proprietorships and general partnerships?
The advantages of the corporate form of organization over sole proprietorships and general
partnerships are the ease of transferring ownership, the owners' limited liability for business
debts, the ability to raise more capital, and the opportunity of an unlimited life for the
business. The key disadvantages are double taxation and higher formation costs. 24.
Why might a highly successful sole proprietor change the structure of his/her firm
to the corporate form of ownership if that change results in the sharing of profits with other investors?
A sole proprietorship has a limited life, limited access to additional capital, and unlimited
liability for the owner. By switching to the corporate form, the sole proprietor can obtain
additional capital while reducing his/her potential liability to the amount he/she invested in the
firm. Also, the sole proprietor can sell a portion of the business enabling him/her to diversify
their holdings while still maintaining majority control if desired. The primary downsideof the
change is the incurrence of double taxation 25.
What should be the primary goal of the financial manager of a corporation? Explain why this is appropriate.
The appropriate goal is to maximize the current value of the outstanding stock. This goal focuses on
enhancing the returns to the current stockholders who are the owners of the firm.Other goals, such as
maximizing sales or earnings, focus too narrowly on accounting profits and ignore the importance of
market values in managerial finance CHAPTER 02 26.
Briefly explain the term "discount rate."
Discount rate is the rate of return used for discounting future cash flows to obtain the present value.
The discount rate can be obtained by looking at the rate of return, an equivalent investment
opportunity in the capital market. 27.
Intuitively explain the concept of the present value.
If you have $100 today, you can invest it and start earning interest on it. On the other hand, if you have
to make a payment of $100 one year from today, you do not need to invest $100 today but a lesser
amount. The lesser amount invested today plus the interest earned on it should add up to $100. The
present value of $100 one year from today at an interest rate of 10% is $90.91. [PV = 100/1.1 = 90.91] 9 28.
State the "net present value rule."
Invest in projects with positive net present values. Net present value is the difference between the
present value of future cash flows from the project and the initial investment. 29.
Briefly explain the concept of risk.
If the future cash flows from an investment are not certain then we call it a risky cash flow. That
means there is an uncertainty about the future cash flows or future cash flows could be different from
expected cash flows. The degree of uncertainty varies from investment to investment. Generally,
uncertain cash flows are discounted using a higher discount rate than certain cash flows. This is only
one method of dealing with risk. There are many ways to take risk into consideration while making financial decisions. 30.
State the "rate of return rule."
Invest as long as the rate of return on the investment exceeds the rate of return on equivalent
investments in the capital market. 31.
Discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.
If a dollar tomorrow is worth less than a dollar a day after tomorrow, it would be possible to earn a
very large amount of money through "money machine" effect. This is only possible, if someone else is
losing a very large amount of money. These conditions can only exist for a short period of time, and
cannot exist in equilibrium as the source of money is quickly exhausted. Thus a dollar tomorrow
cannot be worth less than a dollar the day after tomorrow. 32.
Define the term "perpetuity."
A perpetuity is defined as the same cash flow occurring each year forever. 33.
Describe how you would go about finding the present value of any annuity given the
formula for the present value of a perpetuity.
The present value of any annuity can be thought of as the difference between two perpetuities one
payment stating in year-1 (immediate) and one starting in year (n + 1) (delayed). By calculating
difference between the present values of these two perpetuities today we can find the present value of an annuity. 34.
What is the difference between simple interest and compound interest?
When money is invested at compound interest, each interest payment is reinvested to earn more
interest in subsequent periods. In the simple interest case, the interest is paid only on the initial investment. 35.
Briefly explain, "continuous compounding."
As frequency of compounding increases, the effective rate on an investment also increases. In case of
continuous compounding the frequency of compounding is infinity. In this case, the nature of the
function also changes. The effective interest rate is given by (er - 1), where the value of e = 2.718. e is
the base for natural logarithms. 10