COMM 122 Lecture Notes - Lecture 1: Full-Time Equivalent, Cash Flow, Indirect Costs
15 May 2017
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Problems with too little debt: excess cash flow, buy useless assets and projects, shirking (low ceo investment in company, lacking tax shields. Problems with too much debt: costs associated with bankruptcy, not bankruptcy itself, direct costs of distress. Indirect costs: milking property, underinvestment, asset substitution (risk shifting) (taking on risky projects) Goal: distinguish between the apv, fte and wacc. Discount cash flow from project to the equity holders of the levered firm at the cost of levered equity capital, rs. Three steps in the ftw approach: calculate the levered cash flows, calculate rs using a target debt to equity ratio, valuation. Book value of assets is usually not equal to market value of assets. Book value is based o(cid:374) historical data; (cid:373)arket value is today"s value. Discount the unlevered cash flows at the weighted average cost of capital. Why lbo: efficiency gains, asset sales, operational improvements, restructuring management.
