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Week07_LectureNotes_ - Lectures so farWeeks 1-4 Lectures so farWeeks 4-6 Corporate objective = Maximise firm value What you need to measure value

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1 Lectures so far…Weeks 1-4 Corporate objective = Maximise firm value How to measure value ? – Bond value = t t B r F r r C V 1 1 ) 1 ( 1 – Share value= – Firm value = – Project value =  1 0 1 n n n R D P Lecture 07 1 1 1 t t t r C V 0 1 1 C r C NPV N t t t Lectures so far…Weeks 4-6 What you need to measure value? – Type of cash flow – Timing of the cash flow Riskiness of the cash flow Capital Budgeting: Evaluation Step 1: Forecast cash flows Step 2: Determine risk of cash flows Step 3: Apply evaluation technique(s) Step 4: Accept/reject proposal based on quantitative & qualitative analysis Lecture 07 2 Lectures so far…Week 6 Incorporating risk (uncertain cash flows) into capital budgeting analysis involves: – applying techniques that assess the risk level of a project’s cash flows – using a risk adjusted discoun rate – using a risk-adjusted discount rate L7 : Risk & Return L8 : Capital Asset Pricing Model L9 : Cost of Capital Lecture 07 3 Risk & Return RTBWJ Chapters 10 & 11 RETURNS ON INVESTMENT When an investment is made, there is the expectation that this investment will generate positive returns. There are two different ways of measuring the There are two different ways of measuring the return generated by an investment 1. Dollar Returns 2. Rate of Return 5 Lecture 07 DOLLAR RETURNS The dollar return is the difference between the amount you receive at the end of the investment and the amount initially invested. ceived Re Amount turn Re Dollar 6 Lecture 07 Invested Amount
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2 DOLLAR RETURNS (CONT.) To fully understand this measure, you need two more pieces of information. 1. The scale of the original investment. 2. The length of time the investment has been held for. 7 Lecture 07 RATE OF RETURN A more useful measure is the rate of return: Invested Amount turn Re Dollar turn Re of Rate This gives a percentage answer which is much easier to understand. 8 Lecture 07 DOLLAR VS RATE OF RETURN: EXAMPLE A share investment costs $2 per share at the start of the year It is offering a year-end dividend of $0.20 and the year–end share price is expected to be $2.50 What is your investment return if held for a year, in What is your investment return if held for a year, in dollar and percentage terms? 9 Lecture 07 DOLLAR VERSUS RATE OF RETURN: EXAMPLE (CONT.) $0.70 $2.00 - $2.50] [$0.20 Invested Amount - Received Amount Return Dollar Dollar Return 10 Lecture 07 Percentage Rate of Return 35% or 35 . 0 00 . 2 $ 70 . 0 $ Invested Amount Return Dollar Return of Rate RETURNS AND RISK Returns are closely related to risk.
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This note was uploaded on 07/25/2011 for the course FINS 1613 taught by Professor Drkhshim during the Two '10 term at University of New South Wales.

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Week07_LectureNotes_ - Lectures so farWeeks 1-4 Lectures so farWeeks 4-6 Corporate objective = Maximise firm value What you need to measure value

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