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QR FM Final 11440
QR FM Final 11440
QR FM Final 11440
Question 9:
M&M key Assumptions:
Answer:
There exists a perfect capital market in which there are no information costs or
transaction costs.
• Debt is risk free and kd remains constant at all levels of gearing.
• Investors are indifferent between personal and corporate gearing.
• Investors and companies can borrow at the same rate of interest.
Transfer pricing:
Transfer pricing is the setting of the price for goods and services sold between controlled (or
related) legal entities within an enterprise. For example, if a subsidiary company sells goods to
a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer
price
Transfer pricing adjustments may be necessary for transactions between connected companies,
to ensure that companies cannot reduce their tax liabilities by using a transfer price that is
below or above an arm's length price. In the context of capital structure, this means that if one
company in a group has borrowed money from another company in a group, an adjustment will
be necessary if it is deemed that the interest rate charged is not set at a market rate.
Cash conversion cycle:
The Cash Conversion Cycle (CCC) is a metric that shows the amount of time it
takes a company to convert its investments in inventory to cash. The conversion
cycle formula measures the amount of time, in days, it takes for a company to
turn its resource inputs into cash.
Where:
Free cash flow (FCF) is the cash flow available for the company to repay creditors
or pay dividends and interest to investors. Some investors prefer FCF or FCF per
share over earnings or earnings per share as a measure of profitability because it
removes non-cash items from the income statement.
USES:
Dividends. ...
Share repurchases. ...
Paying Down Debt. ...
Reinvesting in the Company. ...
Acquisitions. ...
Shareholder Yield = Cash Dividends + Net Share Repurchases + Net Debt
Paydown / Market Capitalization.