MGMT310NotesChpt02

MGMT310NotesChpt02 - PURDUEUNIVERSITY SPRING2011 CHAPTER2:...

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KRANNERT SCHOOL OF MANAGEMENT PURDUE UNIVERSITY SPRING 2011 CHAPTER 2: BALANCE SHEETAND INCOME STATEMENT How to value cash flows today that occur in the future Find the PV of cash flows by “discounting” them How to determine a discount rate appropriate for our risk Calculate the WACC Incorporates who you get $ from: %Debt and %Equity How much return each type demands R d : ImpliedYTM on public bonds R e : Calculated with CAPM which measures systematic risk MGMT 310: Spring 2011 Dr. Amanda Thompson 1
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WACC for new project Target “capital structure” = 40% debt MarketYTM of existing bonds = 4% Beta of project = 1.43 Tax rate = 40% Risk Free Rate(=.11%) and MRP(=8.5%) as in project Project cash flows Year 0 (now): Invest $1.5M Year 1 4: $155,000 Year 5: Sell firm for $1.49M MGMT 310: Spring 2011 Dr. Amanda Thompson 2
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Would you recommend beginning the project? What is the smallest sale price for the firm at the end of year 5 for which you would still recommend the project? Final piece of puzzle: Cash flows and decisions Financial Statements Purpose of Financial Statements Key source of _____________for financial decisions Primary means of communication Best available information for internal and external ______________________ Internal: External: May not reflect reality perfectly, but provides information for analysis in a _________________ MGMT 310: Spring 2011 Dr. Amanda Thompson 3
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