FINC312 Final Study Guide - Chapter 13 Capital Budgeting...

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Chapter 13 – Capital Budgeting – Estimating Cash Flows and Analyzing Risk Free cash flow – cash flow available for distribution to investors FCF = NOPAT – net investment in operating capital FCF = [NOPAT + depreciation] – [net inv. in op. capital + depreciation] FCF = investment outlay + operating CF + NOWC CF + salvage CF Risk Stand alone risk – project risk if it were the firm’s only asset and there were no shareholders; ignores firm and shareholder diversification, measured by std. deviation of NPV Corporate risk – reflects the project’s effect on corporate earnings stability; considers firm’s other assets (diversification); depends on project’s std. deviation and correlation with other projects, measured by the project’s corporate beta Market risk – reflects the project’s effect on a well-diversified stock portfolio; takes into account stockholder’s other assets; depends on project’s std. dev. And correlation with the stock market; measured by the project’s market bets Risk analysis Sensitivity analysis – indicates how much NPV will change in response to a given change in an
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