* Include managerial perquisite consumption (cars, etc.),
monitoring costs of shareholders, takeover defense fees
* Can not be reduced through antitakeover measures
Total Cash Flow To Firm:
* Includes operating cash flow, additions to
net working capital, capital spending
* Does not include cash dividends.
* NPV = present value of future cash flows - initial costs
* If NPV>0, invest. If NPV<0, reject
* Internal Rate of Return = discount rate that makes NPV cash flow = 0. IRR > discount rate, go.
IRR <discount rate, reject
* Inflation is treated properly in NPV analysis by discounting nominal cash flows by a nominal rate
* Real rate = Nominal rate - Inflation
* Shareholders depend on mgrs. to maximize value by following the NPV rule to choose investments
* A mutually exclusive project is one whose acceptance/rejection effects other projects.
* Total cash flow = cash flow - capital spending - NWC increases.
* Shortcomings of using accounting rate of return (ARR) are: use of net income instead of cash
flows, pattern of income flows has no impact on ARR and there is no clear cut decision rule.
* Cash flows recognize the risk of and when cash flows occur.
Total Annual return 1926 - 1999
smal co. stock
long-term corp. bonds 5.9
long term gov’t bonds
int’mdt gov’t bonds
US T-Bil s
Your client is celebrating her 45th B-day today and plans to retire in 20 years.
Average annual return will equal 10%. She wants an
annual retirement income of $100,000 per year (in nominal dollars). Your client will make annual deposits to her retirement account
beginning today and ending on her 65th B-day.
How much must your client have invested in her retirement account as of today so that she is able to meet her stated retirement
goal? Assume the first withdrawal is made on your client’s 65th birthday and the last is made on her 100th birthday, for a total of
36 annual withdrawals of $100,000.
$158,219 On your client’s 64th birthday, The 36 annual withdrawals of $100,000 are worth $100,000/0.10 * (1-1/(1.10)
Discounting this an additional 19 years to today (your client’s 45th birthday), yields $158,219.
Thus, your client needs
to have this amount in her retirement account today to fund 36 annual withdrawals of $100,000 beginning 20 years from today.
Assume your answer to part (A) is $150,000. If your client currently has no money in her retirement account, how much must your
client deposit in each year to fund her retirement income through the age of 100?
Assume the first deposit is made today and the
last is made on your client’s 65th birthday, for a total of 21 annual deposits.
$15,768 The present value of your client’s deposits must equal the present value of the anticipated withdrawals ($150,000).