NPV

FCF
1 g t
* (1 (
))
rg
1 r

=
S

M&A
Revenue
Rev1*Expt.Growth = Rev2
syn=(RevA+RevB)*Expt.Growth
COGS COGS%*Rev2 = COGS2
syn=[(RevA/(RevA+RevB))*%COGSA+RevB/(RevA+RevB))*
%COGSB]*Rev1
DEPN
DEPN1*Expt.Growth = DEPN2
syn=(depA+depB)*g
EBIT
REV-COGS-DEPN
EBIT (1-tc) = (REV*(1-COGS2)-g)(1-tc)
LESS CAPEX =CAP.SPEND*Expt.Growth
syn=(CAP.SPENDA+CAP.SPENDB)*g
Re = cost of equity
PLUS DEPN = DEPN2
syn= DEPNA+DEPNB
Rd = cost
of debt
LESS NWC = (Rev2*%WC)-(Rev1*%WC) = REV2*%WC*Expt.Growth syn=SUM
NWC
FCF = EBIT (1-tc) CAPEX+DEPN-NWC = EBIT(1-tc)-NET.CAPEX-NWC
E = market value of the firm's equity
Market premium = rm-rf
Cost of Equity (initial) = rf+market premium*beta(normal)
D = market value of the firm's debt
FIRM1*CoE1/FIRMSYN + FIRM2*CoE2/FIRMSYN
V=E+D
Cost of Equity (stable) = rf+market premium*beta(after growth)
Value of firm =
E/V = percentage of financing that is
Vsyn=FIRMSYN-FIRM1+FIRM2

equity

Net CAPEX= CAPEX*(1+%WC)-DEPN2

CV = P/(r-g) (remember to discount)

D/V = percentage of financing that is

debt

Analyst Recommendations
Evaluate the recommendation; is it consistent with info provided?
1. Describe recommendation or change in recommendation
2. Justify reasons for recommendation
3. Support your answer with quantitative analysis (explain)
4. Link article
FINANCE ARTICLE SUMMARIES
Measuring CEOs on the Hubris Index Mark Hulbert
Overconfident CEOs more likely to pursue or engage in M&A activity which historically has poor
odds of success.
Merger Mayhem Why the latest corporate unions carry great risk Leslie P. Norton
Despite +ve stock price movements felt by target companies upon announcement, investor
enthusiasm for mergers usually dissipates
60-80% mergers financial failures, 60% of trans failed to earn returns greater than annual CoC
required
When Mulling a Takeover, the Terms make a Difference (Roger Lowenstein)
Acquirers who use stock fare worse than those who use cash in a takeover, as they tend to have
overvalued shares, so conferred premium is illusory.
Market Reactions to Australian Boutique Resource Investor Presentations (Andrew Ferguson, Tom
Scott)
+ve cumulative abnormal returns around 15 days before and after presentation, no long term price
benefits due to greater firm awareness, but are informative events in equity markets context.

The Determinants of Stock Price Exposure: Financial Engineering & the Gold Mining Industry
(Peter Tufano)
Market Conditions, Firm Factors, Policies
Information Content of Equity Analyst Reports (Paul Asquith, Michael B. Mikhail, Andrea S.Au)
Relationship between market returns and the content of security analyst reports change in target
price usually causes strong market reaction. Stronger the justification, the stronger the market
reaction. Downgrade recommendations more scrutinized, but valuation methodology not much
effect.
The Market Response to Exploration, Resource and Reserve Announcements by Mining
Companies: Australian Data (Bird, Grosse, Yeung)
Market reacts +vely to both exploration and resource announcements, with the most effect during
low market sentiments. Market often anticipates the release of these announcements, likely due to
insider trading activity.
How do Analysts use their Earnings Forecasts in Generating Stock Recommendations? (Mark T.
Bradshaw)
Little evidence that analyst recommendations explained by residual income model. Analysts give
higher recommendations to growth stocks. Often do not incorporate their earnings forecast into
their stock recommendations using PV models.
Analysts favor stocks with high-growth expectations even though these expectations have already
been impounded into prices.
Fundamental Information Analysis (Baruch Lev & S. Ramu Thiagarajan)