Jonathan Boyers’ Post

One for corporate finance firms...

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The attached article outlines the exciting state of play for the corporate finance space in Ireland. I have some exciting senior corp finance roles on at the moment (Director level), drop me a DM if interested in an exploratory chat.

>>> The Importance of Calculating the Cost of Equity in Corporate Finance In the realm of corporate finance, understanding and accurately calculating the cost of equity is paramount for various financial decisions, including determining the Weighted Average Cost of Capital (WACC), discounting Free Cash Flow to the Firm (FCFF), and obtaining target prices in business valuations. Let's delve into this crucial concept, beginning with the Capital Asset Pricing Model (CAPM), moving to the Hamada formula for levered beta, and incorporating multifactor models like those of Fama, French, and Carhart. The Capital Asset Pricing Model (CAPM) The CAPM is a fundamental model used to calculate the expected return on equity, which serves as the cost of equity. The formula is as follows: Cost of Equity (Ke)=Rf+β(Rm−Rf) Where: Rf is the risk-free rate. β is the beta of the stock, a measure of its volatility relative to the market. Rm is the expected market return. Rm−Rf is the market risk premium. The Hamada Formula To account for the impact of leverage on the company's beta, the Hamada formula is applied to adjust the beta: βL=βUx[1+(1−T)xD/E] Where: βL is the levered beta. βU is the unlevered beta. T is the corporate tax rate. D/E is the debt-to-equity ratio. *** Multifactor Models: Fama, French, and Carhart While CAPM provides a foundational approach, it doesn't fully capture all the risks associated with a company's equity. The Fama-French Three-Factor Model expands on CAPM by including size and value factors: Expected Return=Rf+β(Rm−Rf)+sSMB+hHML Where: SMB (Small Minus Big) accounts for size risk, representing the additional return investors demand for investing in smaller companies. HML (High Minus Low) accounts for value risk, representing the additional return for investing in companies with high book-to-market ratios. The Carhart Four-Factor Model further incorporates momentum: Expected Return=Rf+β(Rm−Rf)+sSMB+hHML+mMOM Where: MOM captures the momentum effect, representing the tendency of stocks that have performed well in the past to continue performing well in the short term. *** Application in WACC and Business Valuation Once the cost of equity is determined, it plays a critical role in calculating the WACC, which is used to discount FCFF and ultimately determine the firm's intrinsic value. This is especially relevant for investors and in M&A transactions, where accurate valuation is crucial. Keep these models in mind as you navigate the complexities of corporate finance, and continue sharing your valuable insights and knowledge! #CorporateFinance #BusinessValuation #CostOfEquity #WACC #InvestmentStrategies #MergersAndAcquisitions #FinancialModeling #ProfessionalGrowth

Corporate finance encompasses a wide range of topics and principles essential for managing the financial aspects of a corporation effectively. Here's an overview of key areas and concepts👇🏻 1 Capital Budgeting ▪️Involves evaluating investment opportunities and deciding which projects to pursue based on their potential to generate returns. 2 Capital Structure ▪️Refers to the mix of debt and equity financing used by a company to fund its operations and investments. Finding the optimal capital structure involves balancing risk and cost of capital. 3 Cost of Capital ▪️Represents the cost of funds used for financing a business. It includes the cost of equity and the cost of debt, weighted by their respective proportions in the capital structure. 4 Financial Markets and Instruments ▪️Understanding financial markets (such as stock markets, bond markets, and derivatives markets) and financial instruments (such as stocks, bonds, options, and futures) is crucial for raising capital and managing risk. 5 Risk Management ▪️Involves identifying, assessing, and mitigating various types of risks, including market risk, credit risk, liquidity risk, and operational risk. 6 Valuation ▪️Determining the intrinsic value of a company or its assets using various valuation methods such as discounted cash flow (DCF), comparable company analysis (CCA), and precedent transactions analysis (PTA). 7 Dividend Policy ▪️Deciding how much of a company's earnings should be distributed to shareholders as dividends versus retained for reinvestment in the business. 8 Working Capital Management ▪️Managing short-term assets and liabilities to ensure the company has sufficient liquidity to meet its operational needs while minimizing costs. 9 Mergers and Acquisitions (M&A) ▪️Involves buying, selling, or combining companies to achieve strategic objectives such as expanding market share, gaining access to new technologies, or achieving synergies. 10 Corporate Governance ▪️Refers to the system of rules, practices, and processes by which a company is directed and controlled. Good corporate governance helps ensure transparency, accountability, and fairness to all stakeholders. 11 Financial Reporting and Analysis ▪️Understanding financial statements (such as balance sheets, income statements, and cash flow statements) and using financial ratios and metrics to assess a company's performance and financial health. 12 Corporate Strategy ▪️Aligning financial decisions with overall corporate strategy to create long-term value for shareholders and stakeholders. These concepts and principles form the foundation of corporate finance and are essential for effective decision-making within corporations. #finance #corporatefinance #financeinsights #linkdin #linkedin #financecareer #linkedinforcreators

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