Chapter 11 Notes
What is capital budgeting?
Long term decisions involve large expenditures
Analysis of potential additions to fixed assets
Very important to firms structure
Steps to capital budgeting
1. what is the fv of 1800 if the rate is 5% compounded quarterly?
2. What is the payment necessary to walk away with 1,250,000 in 40 years if the rate is 8% compounded annually?
3. What is the nominal
If I invest 35,000 into a piece of machinery that will provide thw
following revenues over the next 6 years what would the presnet
value of this investment be today if the discount rate is 2.35%
Solvi
NPER
Annual CPN
Face Value
5
0.08
1000
80
0 PV?
1
80
2
80
3
80
4
80
5
1080
required rate of return is 15%
($805.12)
($1,192.57) 5% premium
($1,000.00) Both have the same risk
($1,184.34)
bond original
downgraded bonds rating, yield to invesrtor increases, bond price will decrease. Inverse relationship between yield and bond price
jump bond - more debt means more risk requires more reward in the for
What is the price of a stock that is currently issuing a dividend of $1.15.
The growth rate rate over the next few years is expected to be 10%, 12%,
0%, and 25%. Afterwards it will be constant at 5%.
Chapter 13 Notes
What determines business risk?
Competition is there a lot of competition within your industry
Is there a lot of demand
Usually if raw materials fluctuate a lot the output price would
EAA - what do we do if there are different lengths of projects
run 4x
0
1
2
3
4
run 3x
-150
60
90
15
-125
80
70
60
10
when you are looking at the length of the project, you have to find the least comm