İŞLETME FİNANSI II - Deneme Sınavı - 4

WACC=wD*kD*(1-T)+wE*kE

0.15=0.5*kd*(1-0.25)+0.5*0.18

kd=0.16=16%

ROIC=NOPAT/Capital=EBIT*(1-T)/Capital

ROIC=400,000*(1-0.40)/1,400,000=0.1715=17.15%

There are many factors affecting the business risk of a firm, however, to summarize we can cite the following:

• Shifts in the demand for the products/ services of the company. Higher volatility of demand for the products/services of the firm escalates the business risk.

• Fluctuations in the sales price due to market volatility. Firms operating in markets with high output price variations are prone to higher business risk.

• Changes in input costs. Uncertainty and excessive volatility in input costs raise the business risk.

•The cost structure of the company, especially the level of the fixed costs in total costs which are measured by the degree of-operating leverage (DOL). If the DOL is high, the firm will be exposed to higher business risk.

• The ability to adapt cost-effective measures to changes in both the input costs and output prices. Some firms can quickly implement cost-effective processes to adjust to the fluctuations in input costs or output prices. This ability reduces the business risk faced by the company.

WACC=EBIT/Firm value

WACC=300,000/(750,000+500,000)=0.24=24%

Value of the firm=EBIT/WACC

Value of the firm=500,000/0.16=$3,125,000

Value of equity=value of the firm- value of the debt = 3,125,000-1,200,000=$1,925,000

MM’s study is based on the following assumptions:

1. Capital markets are perfect with rational investors that can freely buy and sell assets.

2. Investors have homogenous expectations.

3. There are no bankruptcy costs.

4. There are no taxes.

5. There are no transaction costs in financial asset trading.

6. Investors and companies can borrow at the same rate with no restrictions.

7. All investors can access the same information as the managers of a company without paying any information cost.

8. Operating income (EBIT) is not affected by the use of debt.

9. All earnings are distributed to stockholders as dividends (dividend payout ratio is 100%).

10. Well-informed investors have the option to arbitrage.

Signaling Theory:Within the assumption of perfect capital markets, symmetric information holds a significant stand, however, in real life, asymmetric information is observed. Investors do not have and cannot access the same information about the firm as its managers can. Thus, outside investors have a disadvantage in information gathering and this fact has a significant impact on the capital structure decisions. According to the signaling theory, managerial discretion may convey signals to outside investors other than the decisions on the surface.

Net Operating Income Approach: The model assumes that the cost of debt, the WACC and the value of the firm is irrespective of financial leverage. The value of the firm is its net operating income which is also independent of leverage, capitalized at the constant WACC. Therefore, the firm value will remain unchanged by the financing decisions under the assumption of no corporate taxes.

Traditional Approach: A traditional approach is an intermediate model, compromising between the net income approach and the net operating income approach. Traditional approach assumes an optimal capital structure where the WACC is minimized and the value of the firm is maximized. The model suggests that up to a certain level of leverage, the use of debt financing reduces the WACC, but after that optimal level, the WACC escalates depressing the firm value.

The type of projects in which selecting one project prevents other projects from being undertaken are referred to as mutually exclusive projects.

The process of evaluating and selecting longterm investments which are consistent with the firm’s main objective of maximizing shareholders’ wealth is referred to as ......

The sum of present value of all cash inflaws and cash outflows of a project over its life shows the net present value of the project.

The present value of cash inflows equals the present value of cash outflows at the internal rate of return of the project. Hence, the NPV is 0 when cashflows are discounted at IRR.

When NPV is greater than zero, project’s return (IRR) is greater than the cost of capital (the discount rate).  When NPV is smaller than zero, project’s return (IRR) is smaller than the cost of capital (the discount rate).

The discount rate which equates the present value of all cash outflows with the future value of all cash inflows (tern-minal value) is referred to as modified internal rate of return.

The greater the risk of an investment project, the greater will be the requried rate of return from the project and accordingly the greater will be discount rate since there is a positive relationship between risk and return.

analysis is likely to generate relatively more realistic results

Effect of the volatility of stock’s price in stock options is uncertainty of the project’s cash flows in real options.

Contary to the payback period method, discounted payback period method DOES conisder time value of money as projected cash flows are discounted at an appropriate discount rate and their present values are used to calculate payback period.