Lecture_1___Intro_Fall08

Lecture_1___Intro_Fall08 - Corporate Financial Policy(NBA...

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Corporate Financial Policy (NBA 558) Introduction and course overview Johnson Graduate School of  Management Fall 2008 Prof. Mark Leary
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2 Role of finance function Finance function manages flow of cash to/from investors and investment projects Firm’s Operations Financial Manager Capital Markets Invested capital “Real” Investment Operating cash flows Return to financial asset holders
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3 What’s this class about? Three main questions Does it matter how I raise the funds? (capital structure) Do financing decisions affect how I evaluate investment opportunities? Does it matter how I pay back the cash flows? (payout policy)
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4 Some key concepts Why do (corporate) assets have value? Generate cash flows How do we value these assets? Discounted present value of expected cash flows How do we finance the purchase of these assets? Exchange cash today for promise of a piece of the future cash flows How do we value financial assets? Discounted present value of expected cash flows
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5 The Firm as a Portfolio a) ABC Enterprises has $100,000,000 of fixed Assets and another $50,000,000 of cash. The firm has no debt and has 10,000,000 shares outstanding. The expected market risk premium is 6%, and the risk free rate is 5.5%. Equity beta is 1.34. What’s the beta of the fixed assets ? β E = 1.34 = (50/150) β cash + (100/150) β FA β FA = 1.34*(150/100) = 2.01 b) XYZ enterprises has $30m of long-term bonds outstanding and $70m of equity. The expected return on the firm’s assets is 10%. The expected return on the debt is 6.5% . What is the expected return on equity? R A = 1.34 = (30/100) R D + (70/100) R E
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6 What is Firm Value? Think of a firm as a collection of investment projects (or potential projects).
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  • Fall '08
  • LEARY,MARK
  • Balance Sheet, Generally Accepted Accounting Principles, investment opportunities

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