lecture8-350

lecture8-350 - Introduction to Risk and Return Where does...

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Financial Management Introduction to Risk and Return Where does the discount rate come from?
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Financial Management Today’s plan Review of what we have learned in the last lecture Introduction to risk How to measure investment performance Rates of Return 73 Years of Capital Market History Measuring risk and risk premium Two types of risk How to measure systematic risk CAPM
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Financial Management: lecture 8 What have we learned in the last lecture? Other two investment rules IRR Payback period rule Pay attention to: Depreciation Financing Incremental cash flows and opportunity cost Free cash flows or cash flows in finance Cash flows from operations Cash flows from the change of working capital Cash flows from capital investment and disposal
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Financial Management: lecture 8 How to calculate cash flows from operations? Method 1 Cash flows from operations =revenue –cost (cash expenses) – tax payment Method 2 Cash flows from operations = accounting profit + depreciation Method 3 Cash flows from operations =(revenue – cost)*(1-tax rate) + depreciation *tax rate
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Financial Management: lecture 8 Example revenue 1,000 - Cost 600 - Depreciation 200 - Profit before tax 200 - Tax at 35% 70 - Net income 130 Given information above, please use three methods to calculate Cash flows
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Financial Management: lecture 8 Solution: Method 1 Cash flows=1000-600-70=330 Method 2 Cash flows =130+200=330 Method 3 Cash flows =(1000-600)*(1-0.35)+200*0.35 =330
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Financial Management: lecture 8 A summary example ( Blooper) Now we can apply what we have learned about how to calculate cash flows to the Blooper example, whose information is given in the following slide.
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Financial Management: lecture 8 Blooper Industries Year 0 1 2 3 4 5 6 Cap Invest WC Change in WC Revenues Expenses Depreciation Pretax Profit .Tax (35%) Profit 10 000 1500 4 075 4 279 4 493 4 717 3 039 0 1500 2 575 204 214 225 1 678 3 039 15 000 15 750 16 538 17 364 18 233 10 000 10 500 11 025 11576 12 155 2 000 2 000 2 000 2 000 2 000 3 000 3 250 3 513 3 788 4 078 1 050 1137 1 230 1 326 1 427 1 950 2 113 2 , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , - - , , , 283 2 462 2 651 (,000s)
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Financial Management: lecture 8 Cash flows from operations for the first year Revenues - Expenses Depreciation = Profit before tax .-Tax @ 35 % = Net profit + Depreciation = CF from operations 15 000 10 000 2 000 3 000 1 050 1 950 2 000 3 950 , , , , , , , , - or $3,950,000
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Financial Management: lecture 8 Blooper Industries Net Cash Flow (entire project) (,000s) Year 0 1 2 3 4 5 6 Cap Invest -10,000 Change in WC -1,500 -2,575 -204 -214 -225 1,678 3,039 CF from Op 3,950 4,113 4,283 4,462 4,651 Net Cash Flow -11,500 1,375 3,909 4,069 4,237 6,329 3,039 NPV @ 12% = $3,564,000
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Financial management: lecture 8 Question A project costs $2,000 and is expected to last 2 years, producing cash income of
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lecture8-350 - Introduction to Risk and Return Where does...

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