lecture5-819

lecture5-819 - Valuation and levered Betas A preparation...

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FIN 819: lecture 5 Valuation and levered Betas A preparation for case problems in Star-River
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FIN 819: lecture 5 Today’s plan Review what we have learned in the last lecture An example of a cash-flow calculation Examine the impact of financing on the cost of equity (levered Betas) Two approaches to calculate NPV WACC ( weighted average cost of capital approach) APV (adjusted present value approach)
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Please consider the following cash-flow calculation problem! Firm Excellent has an old machine packaging machine that can be used for another 3 years. The remaining book value for this old machine is $15,000, which can be depreciated in the next three years by using the straight-line depreciation approach. If the old packaging machine is used, the annual total cost of operation, labor and maintenance cost is $10,000. In the market, the new packaging machine is available now at the price of $50,000, which will increase by 5% annually. Based on Excellent’s experience, the new packaging machine will be used forever. The capital investment cost of the new package machine will be depreciated in the next 10 years by using the straight-line depreciation approach. The annual total cost of operation, labor and maintenance cost will be $8,000 when the new package machine is used. Question: do you want to invest in the new packaging machine now or 3 years later? (the tax rate is 40%) FIN 819: lecture 5
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FIN 819: lecture 5 How does debt financing affect investment? When firms issue debt, tax-shield and
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lecture5-819 - Valuation and levered Betas A preparation...

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