week13 - Class Marks FIN 221 Lecture 12 Introductory...

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1 FIN 221 Lecture 12 Introductory Business Finance REVISION LECTURE Class Marks • Your class mark will be released by the end of next week via SOLS. • Aelee Consultations during recess – Tuesday 10.30-12.30 – Wednesday 2:00-4:00 How do I study for the final exam? • Focus on the Key questions on SUMMARY page of each lecture note? Can you answer it? • Focus on the topics covered in the LECTURE • Do Tute Qs and Do Workshop Qs FIN221 Final Exam • To be held from 9:00am to 12:15pm on Thursday, 17 th June •FORMAT – 20 Multiple Choice Questions – 6 Short-Answer Questions 6 Short Answer Questions • Make sure your calculator is working. What is ‘Business Finance’ about? Tools and Analysis used by corporate managers in making financial decisions in a way that maximises shareholders’ wealth Goal of Financial Managers • Maximise shareholders’ wealth • Every decision they make should be consistent with this goal. – Investment decision – Financing decision Financing decision – Working Capital management decision •To maximise ______ , You’ve got to minimise ___ , the level of which reflected in discount rate, i = = + N t t t0 CF (1 ) i Value =PV
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2 CFs Available for Shareholders CFs Available for Debtholders CFs Available for both Debtholders & Shareholders Interests & Principal Dividends Free Cash Flows R PV= (1 +WACC n n nn F $C 1 P1 - i( 1 + i )( 1 + i ) ⎡⎤ =+ ⎢⎥ ⎣⎦ B 0 1 D(1+g ) D P R-g == 0 0 D P R = (1+ i) n +WACC) t+1 t D P = 33 12 0 233 DP DD P (1 R ) + + ++ + + CFs Available for both Debtholders & Shareholders Free Cash Flows (1 +WACC) n NPV = -COST + L5: Capital Budgeting (Q1) Application of the NPV method • Estimation of cash flows is critical then how? • Only incremental free cash flows are relevant – Additional cash flows to be brought as a result of adopting a new project • Know what to Include/Exclude in Cash-flows: – Use Cashflows not accounting income – Exclude financing charges – Ignore sunk costs – Include opportunity costs – Include side effects • Include taxation – 1) Make CF After-tax Application of the NPV method • Include taxation – 2) Sale of Asset –Made Gains ? Pay Tax! A/T CF=Sale Price – (Gain)*Tc loss ? Save Tax! A/T CF=Sale Price +(Loss)*Tc •Don t fo r g e t Net Working Capital (CA-CL) – When CA-CL > 0 then at year + at year end When CA CL > 0 , then 0 , + at year – When CA-CL < 0 , then + at year 0 , - at year end • Keeping the above in mind, U should be able to compute how to Application of the NPV method 1. Determine the initial investment at Year 0 . 2. Determine Free Cash Flow during the life of the project 3. Determine Terminal CFs at Terminal Year 4. Compute NPV using Cost of Capital (=WACC) and Make a final decision FIN 221 Ltd is considering the purchase of a new high-speed widget grinder to replace the existing grinder. The following information relates to the evaluation.
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week13 - Class Marks FIN 221 Lecture 12 Introductory...

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