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Articles by Probir Banerjee
Page 16 of 45
What is Levered Beta in Corporate Finance?
Levered beta indicates the systematic risk a stock has in the capital asset pricing model (CAPM). In CAPM, the function of the financial debt versus equity represents the levered beta or equity beta.The debt a company collects from the markets and the equity it has in its reservoir make up the comparison that shows the levered beta of a stock.The debt portion of an investment in a project that has been resourced from the market makes big difference in the financials of the project.If a large amount of debt is used to finance a project, the risks associated with the ...
Read MoreWhen should Capital Cash Flow (CCF) approach be used in evaluating a project?
The choice of using Capital Cash Flow (CCF) in evaluating an investment project is related more to convenience than theoretical grounds. CCF is not the only approach for evaluating an investment project. It is used to evaluate a project when some certain conditions are present. In this article, we will discuss the conditions that should be met in order to choose CCF as an evaluation tool for an investment project.The evaluation of a project rests more on whether debt is fixed, or the debt-to-equity ratio is fixed in an investment. The fact is that, calculations of a project can be ...
Read MoreWhat is Asset Beta or Unlevered Beta?
The asset beta or unlevered beta of the assets of a company is a representation of the systematic risks of the assets. The asset beta is the weighted average of debt beta and equity beta of the assets. It is also called unlevered beta because it can be determined from the equity beta.To determine the unlevered beta, the equity beta has to be divided by a factor 1 plus (1 minus tax rate) times the debt-to-equity ratio of the company. That is, $$\mathrm{Unlevered \:Beta\:=\:\frac{Equity\: Beta}{1+[(1-Tax \:rate)\times(\mbox{Debt-Equity} \:Ratio)]}}$$Asset Beta and Systematic RiskAsset beta also has a direct impact on the systematic ...
Read MoreFinancial flexibility Vs Operating flexibility
Financial FlexibilityFinancial flexibility refers to the capability of a company to respond to its cash flow or an investment opportunity set in a timely and value-maximizing manner. The concept of financial flexibility is not new, but the most corporate approach has been via the Miller and Modigliani model of capital structure where the corporate performance is judged in a perfect capital market. Such capital markets are frictionless, and they perform in a costless manner where the firms can enjoy complete flexibility of arranging their capital structure.Financial Flexibility is Important in Uncertain TimesFinancial flexibility plays a critical role only when the ...
Read MoreWhy Free Cash Flows are called Unlevered Cash Flows?
Free Cash Flow (or FCF) is a widely used metric in finance and it is sometimes known as the unlevered cash flow. But before we dive deeper into why FCFs are called so, let's begin with what FCFs are.What is Free Cash Flow?Free Cash Flow is a cash component that a company retains after investing and distributing money to all kinds of debt outstanding in the market. FCF is a measure of the wellbeing of a company and so, it is of interest to the lenders and debt-holders of the company.Simply put, FCF is the funds that remain after repaying ...
Read MoreWhat is Capital Cash Flow method?
In Free Cash Flow (FCF) method, the interest tax shield is adjusted in the discount rate which is also called weighted average cost of capital (WACC). The adjustment is not done in cash flows of the firm. We can take an alternate measure to adjust the cash flow where the adjustments are not made in tax shields of the business. This is known as Capital Cash Flow (CCF) approach.In this approach, interest tax shields are adjusted in cash flows rather than in discount rates. This method of adjusting tax shields in cash flow is known as capital cash flow. In ...
Read MoreHow are equity cash flows calculated?
Equity cash flow is the amount of money a company can return to its investors after paying all the debt it acquired from the market. Also called free cash flows to equity, equity cash flows show the health of a company, as it contains the money that is left after paying all the loans the company has taken from the investors.How to Calculate Equity Cash Flows?While there are many formulas to calculate equity cash flows, the most common is the one that uses net income and changes in working capital.This formula is expressed as −Free Cash Flow to Equity ...
Read MoreSteps involved in using the Adjusted Present Value (APV) approach
The Adjusted Present Value (APV) approach can handle both perpetual and uneven cash flows. It can be used in calculating the adjusted present value of a levered firm that has many financing effects. The APV approach divides the NPV into two basic parts −The first part includes the all-equity NPV, assuming that the project is entirely financed by equity.The second part consists of the interest tax shields and all types of financing effects.We can write, $$\mathrm{APV = All\:Equity\:NPV\:+\:Value\:of\:Financing\:Effects}$$Steps in Adjusted Present Value ApproachThe use of APV consists of three steps −The first state of application of APV includes determination of ...
Read MoreWhat is meant by a pure-equity firm?
A pure-equity or an unlevered firm obtains all its funds internally and does not require to obtain any debt from the market. In other words, pure-equity firms are debt-free. Therefore, in case of an investment, a pure-equity firm doesn’t have to pay any interest for the debt the company may acquire from the market.Debt-free companies may use retained earnings or revenues generated from their existing projects to fund an investment project, so they do not need to acquire financing externally.Pure-equity firms use the asset cost of capital instead of the cost of equity to fund their investment projects. It is ...
Read MoreWhat is Adjusted Present Value approach?
Like Free Cash Flow (FCF) and Capital Cash Flow (CCF), Adjusted Present value (APV) is another way of evaluating an investment project. However, it is completely different from FCF and CCF approaches.FCF and CCF are primarily related to interest tax shields and they do not consider the various financing effects that may affect the value of the investment project. In fact, most of the investment projects contain some form of financing effects and so Adjusted Present Value approach is a more utilized approach in practice.It is known that FCF approach of evaluating a project is good when the debt-to-value ratio ...
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