The image is a summary of key concepts in Corporate Finance, likely from materials related to the Chartered Financial Analyst (CFA) program. I'll go over the main points covered:

1. Weighted Average Cost of Capital (WACC): WACC represents a firm's cost of capital where each category of capital is proportionately weighted. The formula provided calculates WACC using the cost of equity (ke), cost of debt (kd), tax rate (t), proportions of equity (we) and debt (wd), and the cost of preferred stock (kp).

2. Cost of Preferred Stock: This is calculated as the dividend per share on the preferred stock (DPS) divided by the price per share (P).

3. Cost of Equity Capital: It can be calculated by taking the dividend per share next period (D1), divided by the current market value per share (P0), plus the growth rate of dividends (g).

4. Cost of Equity Using CAPM: The Capital Asset Pricing Model (CAPM) estimates the cost of equity using the risk-free rate (RFR), the beta of the security (β), and the expected market return (Rmk).

5. Capital Budgeting: Capital budgeting techniques are presented, including the Net Present Value (NPV) formula and the Internal Rate of Return (IRR), which is the discount rate that makes NPV equal to zero.

6. Pure-Play Method Project Beta: This method is used to calculate a project's beta based on a comparable company's asset beta. The formula adjusts for the firm's tax rate (t) and debt-to-equity ratio (D/E).

7. Measures of Leverage: This includes formulas for total, operating, and financial leverage, which show the sensitivity of the firm's earnings to changes in sales, EBIT (earnings before interest and taxes), and net income, respectively.

8. Breakeven Analysis: The image shows formulas for calculating the breakeven quantity of sales, both for the total cost and on an operating basis.

9. Working Capital Management: It highlights the primary and secondary sources of liquidity which include cash balances, short-term funding, cash flow management, and strategies for managing liquidity such as liquidating assets or negotiating debt agreements.

10. Corporate Governance: The image describes one-tier and two-tier board systems, the roles of various board committees like Audit, Governance, Nominations, Remuneration, Risk, and Investment committees.

11. Cost of Trade Credit: This is the cost of not taking a discount offered for early payment. The formula provided calculates this cost based on the discount offered, the percentage of the discount, and the number of days until the full payment is due.

The information encapsulates several fundamental corporate finance concepts that are critical for making investment, financing, and dividend decisions in a corporate setting. Understanding these concepts is essential for anyone preparing for the CFA examination or working in the field of finance.

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Let's dive into a more detailed framework of the corporate finance concepts outlined in the image:

1. Weighted Average Cost of Capital (WACC):

   • WACC Formula: WACC=(wd×kd×(1−t))+(wps×kps)+(we×ke)WACC=(wd​×kd​×(1−t))+(wps​×kps​)+(we​×ke​)

   • Here, wd,wps,wewd​,wps​,we​ represent the weights of debt, preferred stock, and equity in the firm’s capital structure, respectively.

   • kdkd​ is the cost of debt, kpskps​ is the cost of preferred stock, and keke​ is the cost of equity.

   • tt stands for the corporate tax rate, acknowledging the tax deductibility of interest expenses on debt.

2. Cost of Preferred Stock (kp):

   • kp=DPSPkp​=PDPS​​

   • DPSDPS​ denotes the fixed dividend expected to be paid on a preferred stock, and PP is the current price of the preferred stock.

3. Cost of Equity Capital (ke):

   • ke=D1P0+gke​=P0​D1​​+g

   • D1D1​ is the expected dividend in the next period, P0P0​ is the current stock price, and gg is the growth rate in dividends, which reflects the expected rate of return for equity holders.

4. Cost of Equity Using CAPM:

   • ke=RFR+β×(Rmk−RFR)ke​=RFR+β×(Rmk​−RFR)

   • This formula takes into account the risk-free rate (RFR), the beta of the stock (β), which measures its volatility relative to the market, and the expected market return (Rmk).

5. Capital Budgeting:

   • Net Present Value (NPV): NPV=CF0+CF1(1+k)1+CF2(1+k)2+...+CFn(1+k)nNPV=CF0​+(1+k)1CF1​​+(1+k)2CF2​​+...+(1+k)nCFn​​

   • The NPV calculation involves discounting future cash flows (CF) back to their present value using a discount rate (k).

   • Internal Rate of Return (IRR): It's the discount rate that makes the NPV of all cash flows from a particular project equal to zero.

6. Pure-Play Method Project Beta:

   • Used to estimate a project’s risk (beta) by unleashing a comparable company’s beta to reflect the subject firm’s capital structure.

   • Adjusts for different debt levels between companies and their effects on risk due to different tax rates.

7. Measures of Leverage:

   • Total Leverage: How net income changes in response to a change in sales.

   • Operating Leverage: Sensitivity of EBIT to changes in sales.

   • Financial Leverage: Degree to which net income changes with a change in EBIT.

8. Breakeven Analysis:

   • The formulas provided calculate the quantity of sales needed to cover all operating and financing costs, distinguishing between fixed and variable costs.

9. Working Capital Management:

   • Primary Sources of Liquidity: Immediate sources like cash and short-term funding.

   • Secondary Sources of Liquidity: More strategic options such as asset liquidation and debt renegotiation.

10. Corporate Governance:

    • Describes the structure and responsibilities of one-tier and two-tier board systems and the different committees like Audit, Governance, Nominations, Remuneration, Risk, and Investment that form a part of corporate governance.

11. Cost of Trade Credit:

    • This formula calculates the annualized cost of forgoing a discount for early payment on trade credit.

Each of these areas contains complex financial theories and practices that form the basis of corporate finance decisions. These formulas and concepts are fundamental for financial analysis and are part of the core knowledge expected of a CFA charterholder or any finance professional engaged in corporate finance activities.

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Let's discuss each of the corporate finance concepts outlined in the image with real-world examples, applying hypothetical financial data for illustration:

1. Weighted Average Cost of Capital (WACC):

   • Suppose a company has a capital structure consisting of 60% equity at a cost of 8%, 30% debt at a cost of 5%, and 10% preferred stock at a cost of 7%, with a corporate tax rate of 30%.

   • WACC Calculation: WACC=(0.6×0.08)+(0.3×0.05×(1−0.3))+(0.1×0.07)=0.048+0.0105+0.007=0.0655WACC=(0.6×0.08)+(0.3×0.05×(1−0.3))+(0.1×0.07)=0.048+0.0105+0.007=0.0655 or 6.55%.

2. Cost of Preferred Stock:

   • A company issues preferred stock with a dividend of $5 per share, and the current market price of the preferred stock is $50.

   • Cost of Preferred Stock: kp=550=0.1kp​=505​=0.1 or 10%.

3. Cost of Equity Capital:

   • A company expects to pay a dividend of $2 next year, and its current stock price is $40. If the dividend growth rate is expected to be 3%,

   • Cost of Equity: ke=240+0.03=0.05+0.03=0.08ke​=402​+0.03=0.05+0.03=0.08 or 8%.

4. Cost of Equity Using CAPM:

   • If the risk-free rate is 2%, the market return is expected to be 6%, and the stock's beta is 1.2,

   • CAPM: ke=0.02+1.2×(0.06−0.02)=0.02+1.2×0.04=0.02+0.048=0.068ke​=0.02+1.2×(0.06−0.02)=0.02+1.2×0.04=0.02+0.048=0.068 or 6.8%.

5. Capital Budgeting - NPV & IRR:

   • A project requires an initial investment of $100,000 (CF0), and is expected to generate cash flows of $30,000 annually for 5 years. Using a discount rate of 10%,

   • NPV: NPV=−100,000+30,0001.1+30,0001.12+...+30,0001.15NPV=−100,000+1.130,000​+1.1230,000​+...+1.1530,000​

   • The IRR would be calculated using a financial calculator or software by setting the NPV to zero and solving for the discount rate.

6. Pure-Play Method Project Beta:

   • If a comparable company has an asset beta (unlevered) of 1.0, a tax rate of 30%, and a debt-to-equity ratio of 0.5,

   • Relevered Beta: βproject=1.0×(1+(1−0.3)×0.5)=1.0×1.35=1.35βproject​=1.0×(1+(1−0.3)×0.5)=1.0×1.35=1.35.

7. Measures of Leverage:

   • If a company's EBIT increases from $100,000 to $150,000 due to a 10% increase in sales,

   • Operating Leverage: 50,00010%10%50,000​, indicates high sensitivity of EBIT to sales.

8. Breakeven Analysis:

   • With fixed costs of $200,000, variable costs per unit of $20, and a sale price per unit of $50,

   • Breakeven Quantity: 200,00050−20=5,714.2950−20200,000​=5,714.29 units.

9. Working Capital Management:

   • A company might keep $500,000 in cash (primary liquidity) and have the ability to liquidate $2 million in assets (secondary liquidity).

10. Corporate Governance:

    • A company with a one-tier board consisting of both executive and non-executive directors could oversee both the strategic and operational aspects of the firm.

11. Cost of Trade Credit:

    • If a supplier offers terms of 2/10 net 30, this means a 2% discount is offered if payment is made within 10 days instead of the normal 30 days.

    • Cost of Trade Credit: ( \frac{0.02}{1 - 0.02} \times \left(\frac{365}{30 - 10}\right) \approx 0.0204 \times18.25 \approx 0.3727 ) or 37.27% annualized cost. This high cost suggests that if a company can afford to, it should take the discount rather than pay in 30 days.

Let's continue with the elaboration for the Cost of Trade Credit:

The cost of not taking the discount is substantial, as seen in this example. When the terms are 2/10 net 30, the company is essentially being offered a 2% return on investment for paying 20 days earlier. Over a year, this can add up significantly, which is why the annualized cost is calculated. If the company can invest its money at a lower rate than 37.27%, it should take the discount offered for early payment. If it can invest at a higher rate, it should not take the discount and instead use the money elsewhere.

These examples highlight the practical application of the corporate finance concepts in day-to-day business decision-making and demonstrate the importance of understanding and accurately calculating financial metrics.

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Let’s delve into each concept with another set of examples, aiming to illustrate the practical applications in the real world with hypothetical data and situations that a student might encounter or analyze.

1. Weighted Average Cost of Capital (WACC):

   • A company, XYZ Corp., has the following financing: $500,000 from equity with a cost of 10%, $300,000 from debt at 6%, and $200,000 from preferred stock at 8%. The corporate tax rate is 25%.

   • WACC Calculation: WACC=(500,0001,000,000×0.10)+(300,0001,000,000×0.06×(1−0.25))+(200,0001,000,000×0.08)WACC=(1,000,000500,000​×0.10)+(1,000,000300,000​×0.06×(1−0.25))+(1,000,000200,000​×0.08)

2. Cost of Preferred Stock:

   • Firm ABC issues preferred stock with an annual dividend of $4 and the stock currently trades at $80.

   • Cost of Preferred Stock: kp=480=0.05kp​=804​=0.05 or 5%.

3. Cost of Equity Capital:

   • Company DEF plans to pay a $3 dividend next year. Its stock price is $75 and it has historically increased its dividend by 4% annually.

   • Cost of Equity: ke=375+0.04=0.08ke​=753​+0.04=0.08 or 8%.

4. Cost of Equity Using CAPM:

   • Given a risk-free rate of 3%, an expected market return of 8%, and a stock beta of 1.5,

   • CAPM: ke=0.03+1.5×(0.08−0.03)=0.075ke​=0.03+1.5×(0.08−0.03)=0.075 or 7.5%.

5. NPV & IRR:

   • A project requires a $200,000 investment and is expected to generate $50,000 yearly for the next six years. Using a 9% discount rate:

   • NPV Calculation: NPV can be calculated by discounting each year's $50,000 cash flow at 9% and subtracting the initial investment.

   • The IRR would be the rate that makes this NPV zero, which could be found using a financial calculator.

6. Pure-Play Method Project Beta:

   • Consider a sector company with an unlevered beta of 1.1, in a market where the average D/E ratio is 0.3 and the tax rate is 30%.

   • Relevered Beta: βproject=1.1×(1+(1−0.3)×0.3)βproject​=1.1×(1+(1−0.3)×0.3)

7. Measures of Leverage:

   • If a company’s EBIT goes from $200,000 to $220,000 with a 5% increase in sales:

   • Financial Leverage: This could be used to assess how much net income would change as a result of this increase in EBIT.

8. Breakeven Analysis:

   • A gadget manufacturer incurs $100,000 in fixed costs, produces gadgets with a variable cost of $30 each, and sells them at $50 each.

   • Breakeven Quantity: 100,00050−30=2,50050−30100,000​=2,500 gadgets to break even.

9. Working Capital Management:

   • A retailer maintains $100,000 in cash reserves for daily operations (primary liquidity) and has a warehouse of inventory worth $500,000 that could be liquidated if necessary (secondary liquidity).

10. Corporate Governance:

    • In a dual-board system, an international corporation has a supervisory board that includes members elected by employees, providing a layer of governance oversight beyond the executive board.

11. Cost of Trade Credit:

    • A business receives terms of 3/15 net 45 from a supplier, meaning a 3% discount is offered if payment is made in 15 days instead of the usual 45 days.

    • Cost of Trade Credit: 0.031−0.03×(36545−15)1−0.030.03​×(45−15365​) which gives an annualized cost of not taking the discount.

Each of these examples aims to connect the theoretical financial concepts to realistic scenarios, helping students to understand not just the mechanics of the calculations, but also their practical implications and how they influence financial decision-making in businesses.

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To aid in the consolidation of the 11 corporate finance concepts into long-term memory, here are some major questions that can help students review and reinforce their understanding:

1. Weighted Average Cost of Capital (WACC):

   • What components make up the WACC, and how does each component affect the overall cost of capital?

   • How does a change in the corporate tax rate impact the WACC?

2. Cost of Preferred Stock:

   • How do you calculate the cost of preferred stock, and what are the implications if the price of preferred stock changes?

   • Why might the cost of preferred stock be different from the cost of debt or equity?

3. Cost of Equity Capital:

   • What is the Gordon Growth Model, and how is it used to calculate the cost of equity?

   • How does an increase in the dividend growth rate affect the cost of equity?

4. Cost of Equity Using CAPM:

   • Explain how the beta of a stock influences its cost of equity in the CAPM model.

   • If the market risk premium increases, what happens to the cost of equity?

5. Net Present Value (NPV) & Internal Rate of Return (IRR):

   • Why is the NPV considered a more reliable method than IRR in capital budgeting?

   • Can a project have more than one IRR, and why would that be the case?

6. Pure-Play Method Project Beta:

   • What is the pure-play method, and how is it used to estimate a project’s beta?

   • How does the capital structure of a company influence the project’s beta?

7. Measures of Leverage:

   • Differentiate between operating leverage, financial leverage, and total leverage.

   • How does high financial leverage affect a company’s risk profile?

8. Breakeven Analysis:

   • Why is breakeven analysis important in pricing and production decisions?

   • How does a change in variable costs affect the breakeven point?

9. Working Capital Management:

   • Explain the role of working capital management in maintaining a company’s liquidity.

   • How would an increase in the average collection period for receivables affect the company’s cash flow?

10. Corporate Governance:

    • What are the benefits of having a one-tier board versus a two-tier board?

    • How do different board committees contribute to effective corporate governance?

11. Cost of Trade Credit:

    • Calculate the cost of trade credit for terms of 2/10 net 30 and explain the implications of taking or not taking the discount.

    • Why might a company decide to forego a discount and pay at the end of the credit term?

These questions are designed to prompt critical thinking and application of the concepts, which are essential for deep understanding and retention. They can be used for discussion, written assignments, or practice problems. Each question requires the student to not only recall factual knowledge but also to understand and apply that knowledge to different scenarios, which is key to long-term memory retention.