Capital Budgeting: Cash Flow, NPV, and WACC
Chapter 12: Cash Flow in Capital Budgeting Projects
Opportunity Costs
Allocation of a firm’s resources represents lost opportunities.
Sunk Cost
An expense or obligation the firm is compelled to pay regardless of whether a project is undertaken.
Straight-Line Depreciation Method
Depreciation = (Depreciable basis – Ending book value) / Life of asset
Operating Cash Flow (OCF)
OCF = EBIT * (1 – Tax rate) + Depreciation
Gross Fixed Asset Changes
Almost always change at the beginning and end of a project. At the
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Stock Splits and Book Value
Before Action
Common Stock = 60,000 x $12 = $840,000
Retained Earnings: Given as $400,000.
Total Stockholders’ Equity = $840,000 + $400,000 = $1,240,000
Book Value per Share = $1,240,000 / 60,000 = $20.67
After Stock Split
Total Shares = 60,000 x 3 = 180,000
New Par Value: Reduced to $4 per share.
Common Stock: Total par value remains unchanged = $840,000
Total Stockholders’ Equity = $1,240,000
Book Value per Share: $1,240,000 / 180,000 = $6.89
Stock Dividends and Equity
Read MoreUnderstanding Financial Instruments and Investments
Risk Level:
- Blue Chip: High-yield, large-cap.
- Chicharro: Small or medium-sized, high-risk company.
- Cyclical: Benefits tied to economic activity.
Stock Market Admission and Operations
The admission of shares to trading is the responsibility of the governing bodies of the stock exchange. Companies must be S.A. (public limited companies) and have a minimum capital of €1,202,024.21. They need a minimum number of shareholders (100) who hold less than 25% of the social capital. Companies should have shown
Read MoreUnderstanding Corporate Finance: Analysis, Ratios, and Value
Corporate Finance: An Overview
Corporation: A virtual or fictitious entity created by the state. It possesses its own rights and liabilities, enabling it to enter into contracts, buy, sell, or own property, pay taxes, face prosecution for legal violations, and initiate lawsuits. Corporations offer owners protection through limited personal liability.
Objective: To conduct business activities that enhance corporate profit and shareholder gain. This must be done in accordance with the law, with ethical
Read MoreUnderstanding Financial Intermediaries and Market Ratios
Financial Intermediary
A financial intermediary acts as the middleman between two parties in a financial transaction. While a commercial bank is a typical financial intermediary, this category also includes other financial institutions such as investment banks, insurance companies, broker-dealers, mutual funds, and pension funds. Financial intermediaries offer several benefits to the average consumer, including safety, liquidity, and economies of scale.
Financial Markets
- Primary Market: Markets in
Financial Statement Analysis & Valuation Formulas
Financial Statement Analysis
Key Formulas & Concepts
Balance Sheet Analysis:
- Net Working Capital = Current Assets – Current Liabilities
- Book Equity = Assets – Liabilities
- Market Equity = Share Price x Market Capitalization
- Market-to-Book Ratio = Market Equity / Book Equity
- Enterprise Value = Market Equity + Debt – Cash
Cash Flow Analysis:
- An increase in Accounts Receivable (A/R) reduces cash flow.
- An increase in Accounts Payable (A/P) increases cash flow.
- An increase in Inventory reduces cash flow.
Profitability
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