Week 9 - Corporate Finance

Week 9 - Corporate Finance - Finance 310 Prof. Gamble...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Prof. Gamble CORPORATE FINANCE Goals: Be able to calculate the weighted average cost of capital (WACC) and explain how it can be used in corporate decisions. Be able to calculate simple free cash flows (FCFs) and evaluate the net present value (NPV) of an investment project using these cash flows. Know what the internal rate of return (IRR) is and how it is calculated. Understand the basics of project selection and how it impacts the firm. Reading: Chapters 11, 12, and 13 - “Capital Budgeting Cash Flows,” “Capital Budgeting Techniques” and “Determining the Cost of Capital” Capital budgeting - the process of a firm analyzing and choosing long-term investment projects Most important capital budgeting tool: NPV Net Present Value (NPV) - measures how much a decision changes the value of a company NPV = PV of benefits - PV of costs NPV =PV of (benefits - costs) "Golden Rule" of Investment - Invest if NPV > 0 because doing so will add value to the company; otherwise, do not invest (NPV=0). Example: Disadvantages of using Net Present Value: 1) relatively complex to calculate and 2) relies on an accurate estimate of the discount rate. What is the right discount rate to use? Opportunity cost of capital or cost of capital – the best available expected return offered in the market on an investment of comparable risk and length as the cash flow being discounted A tool for dealing with the difficulty of estimating an appropriate discount rate is to evaluate NPV for a wide range of discount rates. NPV profile
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

Week 9 - Corporate Finance - Finance 310 Prof. Gamble...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online