Capital budgeting process: Determine future incremental cash flows, assess project risk and opportunity
cost of capital, choose projects that maximize shareholder value.
FCF: Only reflects net cash flow from current operating activities (no int exp, divid

Stern School of Business
B40.2302 Corporate Finance
_
Solutions to Problem Set #1: Valuation, Discounting and Free Cash Flows
The solutions to the problems of Chapter 4 of the textbook can be found at the end.
Solutions to Additional Practice Problems
1.

Capital Structure Modigliani-Miller 1958: In perfect capital markets, value of firm is independent of its
capital structure, only depends on operating risk. re increases proportional to D/E (no [1-T] in formula). V
levered = V unlevered. 1963: Firm value

Stern School of Business
FINC-GB.2302 Corporate Finance
_
SUGGESTED STUDY QUESTIONS CASE MARRIOTT CORPORATION: THE COST OF
CAPITAL (ABRIDGED)
1.
Are the four components of Marriotts financial strategy consistent with its growth objective?
Explain.
2.
What

Practice Quizzes
Name:
Quiz 3: Spring 1998
This quiz is worth 10% and you have 30 minutes.
1. You have been provided the information on the after-tax cost of debt and cost of capital
that a company will have at a 10% debt ratio, and asked to estimate the

Stern School of Business New York University
FINC-GB.2302 Corporate Finance
_
Problem Set #2: Recommended Practice Problems on Investments and Capital Budgeting
Below you find a selection of practice problems from Brealey, Myers and Allen (10th edition) o

Stern School of Business New York University
FINC-GB.2302 Corporate Finance
_
Problem Set #1: Recommended Practice Problems on Valuation and Free Cash Flows
Below you find a selection of practice problems on Valuation and the Discounted Cash Flow
framewor

Table A: Market-Value Target-Leverage Ratios and Credit Spreads for Marriott and Its Divisions
Debt
Fraction
Fraction
Percentage
in Capital
of Debt
at Floating
of Debt
at Fixed
Marriott
60%
40%
60%
Lodging
Contract Services
Restaurants
74%
40%
42%
50%
40%

CHAPTER 5
Net Present Value and Other Investment Criteria
8.
This problem focuses on the dominance of the NPV criterion over the (discounted)
payback criterion. The NPV for the respective projects A, B and C, based on a 10%
discount rate, equals -$90.91,

Introduction to Valuation and the
DCF-Framework
Corporate Finance
Spring 2016
1
Defining the Corporate Objective
All investment and financing decisions made by a firm should be aimed at
maximizing the value of the firm
Other objectives (e.g., maximizing

Stern School of Business
FINC-GB.2302 Corporate Finance
_
SUGGESTED STUDY QUESTIONS CASE THE SUPER PROJECT
1.
What are the relevant cash flows for General Foods to use in evaluating the Super Project? In
particular, how should management deal with issues

Corporate Investments and Capital Budgeting
Corporate Finance
Spring 2016
1
The Capital Budgeting Decision
Examples of capital budgeting decisions made by firms:
Should we launch a new product?
Should we enter a new market?
Should we buy another firm?
Sh

Exhibit 6: Financial Evaluation Form of General Foods Corporation for Super Project (in thousands of $s)
1st Per.
2nd Per. _ Per.
_ Per.
_ Per.
Project Request Detail
1. Land
2. Buildings
3. Machinery and Equipment
4. Engineering
5. Other
6. Expense Porti

Note with Further Clarification on the FCF-projections and NPV Analysis of Super
Assumptions
The project analysis is based on the following assumptions:
1. Test market expenses are not included.
2. Incremental overhead costs are included, starting in year

NEW YORK UNIVERSITY
Stern School of Business
FINC-GB.2302.30 Corporate Finance
Professor Anjolein Schmeits
E-mail: [email protected]
Office hours: Monday 5:00 - 6:00 p.m.
Office:
KMC 9-83
Phone: (212) 998-0370
Fax:
(212) 995-4233
1 Course Description

CHAPTER 7
Introduction to Risk, Return, and
The Opportunity Cost of Capital
19.
a.
In general, we expect a stocks price to change by an amount equal to (beta
change in the market). Beta equal to 0.25 implies that, if the market rises by an
extra 5 percen

Stern School of Business New York University
FINC-GB.2302 Corporate Finance
_
Problem Set #3: Recommended Practice Problems on Risk, Return and Discount Rates
Below you find a selection of practice problems from Brealey, Myers and Allen (10th edition) on

Determining the Correct Discount Rate for Firm
and Project Valuations
Corporate Finance
Spring 2016
1
Defining Risk
Definition of Risk: Variability in asset (or project) outcomes or returns
Measure of total risk: variance (2) or standard deviation () in

AswathDamodaran
Websiteforthisclass:http:/people.stern.nyu.edu/adamodar/New_Home_Page/triumdesc.html
Applied Corporate Finance
Aswath Damodaran
www.damodaran.com
What is corporate finance?
Every decision that a business makes has financial implications, a

Capital Structure Changes
Problem 1
a. There are a number of ways in which BMD can increase its debt ratio _
1. It can borrow $ 1.15 billion and buy back stock.
2. It can borrow $ 1.15 billion and pay special dividends.
3. It can borrow more than $ 1.15 b

Sheet1
Problem 1
(1) Book Value Debt/Equity Ratio = 2500/2500 =
Market Value of Equity = 50 million * $ 80 =
$4,000
Market Value of Debt = .80 * 2500 =
$2,000
Debt/Equity Ratio in market value terms =
2000/4000 =
(2) Book Value Debt/(Debt+ Equity) = 2500/

Valuation: Solutions
Problem 1 a. False. The dividend discount model can still be used to value the dividends that the company will pay after the high growth eases. b. False. It depends upon the assumptions made about expected future growth and risk. c. F

Capital Structure Choices
Problem 1
a. Annual tax savings from debt = $ 40 million * .09 * .35 =
b. PV of Savings assuming savings are permanent = $ 40 million * .35 =
c. PV of Savings assuming savings occur for 10 years = $ 1.26 (PVA,9%,10) =
d. PV of Sa

Dividend Framework: Solutions
Problem 1
a. Dividend Payout Ratio = (2 * 50)/480 =
20.83%
b. Free Cash Flows to Equity this year
Net Income
$
480
- (Cap Ex - Depr ) (1-DR)
$
210
- (Chg in WC) (1-DR)
$
35
FCFE
$
235
Dividends as % of FCFE = 100/235 =
42.55%

Chapter 20: Solutions
Problem 1
a. True
b. True
c. False
Problem 2
Firms usually do not change their dividends very frequently. This is what is meant by "sticky" dividends.
Part of the reason for "sticky" dividends is that firms are reluctant to cut divid

AswathDamodaran
Corporate Finance
What is it?
Aswath Damodaran
1
What is corporate finance?
2
Every decision that a business makes has financial implications, and any
decision which affects the finances of a business is a corporate finance
decision.
Defin

AswathDamodaran
STATISTICS: Basics
Aswath Damodaran
1
The role of statistics
2
When you are given lots of data, and especially when
that data is contradictory and pulls in different
directions, statistics help you make sense of the data
and make judgments

AswathDamodaran
1
Valuation
Cynic: A person who knows the price of everything but the value of nothing.
Oscar Wilde
First Principles
2
Maximizethevalueofthebusiness(rm)
The Investment Decision
Investinassetsthatearna
returngreaterthanthe
minimumacceptable

The Time value of money
Aswath Damodaran
Intuition Behind Present Value
There are three reasons why a dollar tomorrow is worth less than a
dollar today
Individuals prefer present consumption to future consumption. To
induce people to give up present consu

AswathDamodaran
1
Capital Structure: The Choices
and the Trade of
Neither a borrower nor a lender be
Someone who obviously hated this part of corporate finance
First principles
2
Maximizethevalueofthebusiness(rm)
The Investment Decision
Investinassetsthat

Aswath Damodaran
1
The Investment Principle: Risk and
Return Models
You cannot swing upon a rope that is attached only
to your own belt.
First Principles
2
Maximizethevalueofthebusiness(rm)
The Investment Decision
Investinassetsthatearna
returngreaterthan