Question

1. Define the following terms (20 pts.): * Blended Valuation Approach • Ex-dividend date * Optimum Capital Structure * Financial Distress * Pecking-Order Theorem * Merger & Acquisition (M&A) * EV/EBITDA * Equity Value * Put Option * Black Scholes Model

Answer 1

1) Blended valuation approach :- It is an approach which takes into consideration the blend of financial, social and environmental values for evaluation. This approach is used for the non profit organization.

2) Mergers and acquisition:- Mergers and acquisition are two different terms , with a little difference in their meaning but the general meaning remaining the same i.e. consolidation of companies.

Merger is situation when two companies combine to form one company, where as acquisition is a situation when one company takes over the other company.

3) Ex-dividend date :- It is the date when the investor doesn't get any dividend, if he buys the stock on or after this date.

4) EV/EBITDA = It is a ratio of enterprise value and EBITDA, which indicates the value of enterprise or company against its EBITDA. It is used for comparing value of different companies.

EBITDA means earning before interest , Taxes and depreciation and amortization. Enterprise value is equal to market value of debt, preferred stock, equity, plus minority interest minus cash and cash equivalent.

5)Optimum capital structure:- A capital structure consists of different sources of fund. It may include equity, preference share, debt, and retained earnings. An optimum capital structure is a structure when the cost of capital i.e. WACC is minimized and the value of assets us maximised.

6) Equity value :- It refers to the market value of common stocks, loans which shareholders have made available to the business. It comprises of enterprise value minus minority interest and short and long term debt , add short and long term investment and cash & cash equivalent.

7) Financial distress:- It is a situation when a company is not able to generate any revenue and pay of its obligation. This is due to economic downturn or high fixed costs.

8)Put Option:- It is an Option which provides right to the buyer to sell the stock and obligation to the seller to buy the stock. It is profitable or exercised , when the strike price is more than the stock price.

9) Pecking order theorem :- Pecking order theory tells us that , we should first raise fund from the cheapest source , i.e. the source having the least cost of capital. The order provided by theory is as follows:- 1) retained earnings 2) Debt, and 3) Equity.

10) Black Scholes model:- It is a model used to find the price of put and call options using a set of variables, which includes volatility, stock price, strike price, time , risk free rate and type of option.