Corporate Finance & Valuation Flashcards

What is the net present value (NPV) decision rule for capital projects?

Answer: Accept if NPV is positive; reject if NPV is negative

A positive NPV indicates a project creates value by generating returns exceeding the cost of capital, so it should be accepted.

When comparing NPV and IRR, which method is theoretically superior for evaluating mutually exclusive projects?

Answer: NPV, because it measures absolute value creation in dollars

NPV is theoretically superior for mutually exclusive projects because it directly measures dollar value added, while IRR can give misleading rankings when project scales differ.

What is the Modigliani-Miller theorem (without taxes) about capital structure?

Answer: In perfect markets, a firm's value is independent of its capital structure

M&M Proposition I (without taxes) states that in a perfect market, capital structure is irrelevant — firm value depends only on its operating cash flows.

What is a leveraged buyout (LBO)?

Answer: A purchase of a company funded mostly with debt, using the target's assets as collateral

An LBO uses significant debt to fund the acquisition, with the acquired company's cash flows and assets servicing and securing the debt.

What does 'dilution' mean in the context of an acquisition using stock as currency?

Answer: The acquirer's earnings per share decrease after issuing new shares for the deal

Dilution occurs when an acquirer issues new shares to fund an acquisition, increasing share count and potentially decreasing earnings per share for existing shareholders.

Which approach to valuation uses financial metrics of comparable publicly traded companies to derive valuation multiples?

Answer: Comparable company analysis (comps)

Comparable company analysis derives market-based valuation multiples (like P/E or EV/EBITDA) from similar public companies and applies them to the target.