UGBA103-F04-class14capitalbudgetingpart1(1slide)

UGBA103-F04-class14capitalbudgetingpart1(1slide) - Capital...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
class #14 page 1 Capital Budgeting part 1 class #14
Background image of page 1

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

View Full DocumentRight Arrow Icon
class #14 page 2 Valuation Example: you live in California and are trying to decide whether or not to build a new power plant You can sign long-term contracts to sell power and buy fuel, so your cash flows can be estimated with a high degree of certainty What is the correct discount rate to use in order to calculate the NPV ? T T 3 3 2 2 1 1 0 ) r 1 ( C ) r 1 ( C ) r 1 ( C ) r 1 ( C C NPV + + + + + + + + + = K
Background image of page 2
class #14 page 3 Assets The second conceptually, difficult point of the course: Assets have two qualities (at least for this course) 1. An asset produces a stream of future cash flows 2. An asset can support a certain level of debt Make a note of these points (learn them)
Background image of page 3

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

View Full DocumentRight Arrow Icon
class #14 page 4 Assets (2) An asset produces a stream of future cash flow: this is not too hard to visualize if you build a power plant (and maintain it) then these assets will produce a stream of cash flows The stream of cash flows may be risky: sales may go up and down if you own a couple power plants, you can eliminate the idiosyncratic risk of one breaking down you CAN’T eliminate the market risk (energy prices may vary with the economy)
Background image of page 4
class #14 page 5 Assets (3) Given that power plants have some market risk, they support an optimal level of debt Too much debt and you may go bankrupt in lean times Too little debt and you are missing out on borrowing at cheap debt rates We’ll talk more about optimal debt later
Background image of page 5

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

View Full DocumentRight Arrow Icon
class #14 page 6 Market value balance sheet Mkt Value of Net Assets Mkt Value of Capital Employed mkt value of net s.t. assets mkt value of long term assets mkt value of other assets mkt value of long term debt mkt value of equity Mkt Value of Net Assets Mkt Value of Capital Employed market value net total assets mkt value of long term debt mkt value of equity Equity Debt Assets Firm MV MV MV MV + = =
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 27

UGBA103-F04-class14capitalbudgetingpart1(1slide) - Capital...

This preview shows document pages 1 - 7. Sign up to view the full document.

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